At the end of 2021, the Federal Reserve predicted it would raise interest rates just three times throughout 2022, with rates not reaching 2% until 2024. On Wednesday, Jerome Powell announced the Fed would raise rates to a range of 4.25% to 4.50%.
What a difference a year makes.
The Federal Reserve now projects that the median interest rate for next year will top 5%, with no rate hikes projected the year after next. Although the Fed has backed off the 75 basis point hikes of the last half year, Powell has committed to a pragmatically hawkish path, bringing rates up past 5% and then keeping them there. For how long? As long as necessary.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” the Fed chairman said in his press conference after the rate hike announcement. “The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”
Naturally, the markets are panicking. After over a decade of zero interest rates and quantitative easing, investors are in the throes of delirium tremens, yearning for free cash and a feeble Fed. But with inflation approaching double digits under his tenure, Powell has changed his tune, finally listening to the data and ignoring the relentless bullying by myopic financiers.
And Main Street is winning despite Wall Street’s losses, thanks to Powell’s approach. As the chairman noted during his press conference, consumer spending has remained robust even as asset bubbles from housing to stock indices correctly deflate. Powell pointed out that the Fed’s unemployment rate projection for next year, 4.6%, is close to the natural rate of unemployment. Translation: The Fed is moving its “maximum employment” marker markedly higher than it was in the reckless quantitative easing.
Quantitative tightening, Powell also noted, has greatly contributed to tightening overall financial conditions. Real interest rates are now positive, and if Wednesday is any indication, Powell wants to keep it that way. In the long run, the Fed projects a federal funds rate of 2.5%, which, prior to this year, is higher than any rate since before the Great Recession. In other words, the era of easy money is over.