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Suppose the Federal Reserve knows what it is doing.
The central bank is slowing the economy with a painful streak interest rate increase. Its goal: to reduce the current 8.3% year-on-year increase in consumer prices to the Fed’s 2% target.
With five of these interest rate hikes under our belt this year, many of us may be wondering: What are the prospects?
Get ready for another year of high interest rates and prices
Most analysts agree – and Fed Chairman Jerome Powell has said – interest rate hikes still have a long way to go. Short-term rates are currently around 3% and the Fed is targeting 4% to 4.5%, so further rate hikes are likely to continue until early 2023.
“While higher interest rates, slower growth, and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” Powell said at an economic policy symposium on the 18th. August. 26. “These are the unfortunate costs of reducing inflation.”
So when does it get better?
Here’s how things should go as we eliminate inflation from the economy:
Until the end of 2022
Look for two more interest rate hikes from the Fed, in November and December.
This means that the cost of money for home purchase and refinancing it is likely to get more expensive until inflation eases. While current 30-year mortgage rates of around 6% are below the half-century average of nearly 8%, we are not likely to see a much lower turnaround in the next 12-18 months.
There is likely to be another hike in interest rates next year, and at that point, the Fed could stand on its feet, seeing how the tighter money supply affects the economy and, more importantly, consumer prices.
After a long period of solid employment growth as the pandemic subsides, employment will weaken. There are likely to be layoffs and corporate cuts. There will be less talk of “the great resignation” or “quiet resignation”.
A significant voice in the crowd sounding a recession alarm is Doug Duncan, chief economist at Fannie Mae, a government-sponsored company that powers financing for the home loan market. He expects a “moderate recession starting in the first quarter of 2023”.
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A September CNBC poll of analysts, economists and fund managers reveals that most believe inflation will have fallen close to the Fed’s 2% target by 2024.
If so, we will enjoy lower prices for food, consumer goods and the general cost of living. However, we will also likely experience higher unemployment and a failing economy.
Once the Fed reaches its 2% inflation target, it will begin lowering interest rates to reactivate the economy.
It’s like driving your car in the middle of the desert until you run out of gas and then hoping to find a gas (or electric) station to refuel and restart the engine. This is how monetary policy should work.
These scenarios are based on a “right” economic reaction to the Fed’s action on interest rates. Of course, as our pandemic times show: there are many unknowns that can ruin the best plans.
What could go wrong? The Fed could shut down the economy with higher interest rates, but consumer costs could also be frozen, not falling at all. Is called stagflation.
In other words, the Fed’s Powell would be looking for a spin until his next stop.
What does this mean for your financial decisions?
We do not live our lives according to a macroeconomic plan. We fall in love, have children, buy houses and get new jobs, all at the whim of unknown forces. So the Fed will do her thing and you should do yours.
Trying to do financial decisions under optimal circumstances it is a ticket to Misery Bay, Michigan. What you can do is:
Do not make an uncertain financial situation worse, for example by taking on some too much debt.
Understand that a good idea today will be a good idea tomorrow. Hasty decisions they are often made with false deadlines.