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Forecasting Federal Interest Rates: No Hikes Until 2024?

With the recent announcement that the Federal Reserve plans to keep its interest-rate policy at close to zero through the end of 2023, market reactions have been mixed, to put it mildly.

While stocks initially surged the morning the Fed published their latest economic forecast, most of those gains were lost soon after Fed Chairman Jerome Powell, spoke to the media.

Great Expectations

In the latest projections from the Fed, the expectation is that core inflation will not rise above the 2% target until 2023 and the job market will improve, with unemployment settling at 4% in 2023.
So, while the Fed expects inflation to hit its healthy target, many Wall Street investors and strategists warn otherwise.

Mixed Reactions

One of those naysayers is Billionaire hedge fund manager Stanley Druckenmiller, who recently noted that the Fed’s actions and congressional spending could take inflation as high as 10% in the next four to five years.
Michael Arone, chief investment strategist at State Street Global Advisors agreed, saying “[Chairman Jerome Powell is] the great and powerful Oz. Investors got duped. They thought enhanced forward guidance meant something, but when they peeked behind the curtain they realized the Fed didn’t do anything, and the market rolled over.”

Silver Lining?

But Rick Rieder, the chief investment officer of global fixed income for BlackRock take a more optimistic view, saying “I just don’t buy the argument that we’re going to have runaway inflation any time soon.” Rieder and others like him still have high hopes that healthcare and education costs will be significantly reduced along with new advances in big data and technology.

This may not be too overly optimistic as technology has quickly responded to the challenge of this global pandemic by providing excellent solutions in telemedicine, remote online education and virtual business meetings.
Perhaps if this trend continues the fear of increased inflation rates over the next four years may be put to rest. But many aren’t so sure.

What If?

Concerns about rising prices and reduced profits are not unwarranted. There is always the possibility that factors brought on by the current global pandemic may yet erode the U.S. economy and drive inflation rates higher. If that happens both consumers and businesses alike could quickly feel the pain.

So, while the U.S. hasn’t experienced high inflation rates for many decades, there are no guarantees. Some economists, like Lynn Reaser, chief economist at Point Loma Nazarene University, believe the increase is unpredictable, if not totally unavoidable. “Low unemployment has been discarded as an inflation driver, but we do not know which culprits we should now watch … neither how long nor how much of an overshoot will be tolerated.”

Several other economists share Reaser’s concerns that rising inflation could arrive sooner than expected. Recently, a whopping 65% of economists surveyed by CNBC said they now see actions by Congress and the Fed as inflationary to our economy, an increase of 44% from a similar survey in July.

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