Economists have warned that the Federal Reserve’s (Fed) terminal interest rate could exceed 5.5%, which is bound to shock financial markets.
The Federal Reserve announced a 2-point rate hike in December last year, raising the federal funds rate to 4.25%-4.5%, a 15-year high, and expects the terminal rate to rise to 5.1% and won’t cut interest rates until 2024. Investors now expect the Fed to stop hiking rates when the terminal rate hits around 5%.
However, Ricardo Reis, a professor and economist at the London School of Economics, believed that the Federal Reserve will eventually raise the terminal interest rate, exceeding current market expectations, and the financial market is bound to suffer.
Reis warned: “All risks are on the upside, terminal rates will be at least 5.5%.”
There are signs that Fed officials aren’t willing to take any chances. “The Fed is unhappy that it doesn’t realize that inflation will continue to rise in 2021, so I think they are leaning towards excessive tightening, whether it’s legal or because they are concerned about righting past mistakes,” Reis. than the public expects”.
“The economy is at an inflection point, and the Fed faces some tough decisions, and the key is wages,” Reis said.
Federal Reserve Chairman Jerome Powell reiterated several times last year that the current wage increase is “much above the level consistent with the 2% inflation rate, which gives a new ‘northern star’ to the journey against the Inflation, or “wages “Will be the focus of monetary policy this year.
US Department of Labor data on Friday (6) showed that the number of US nonfarm payrolls rose by 223,000 in December last year, higher than market expectations, the unemployment rate fell to 3 .5% and the average hourly wage increased by 4.6%, all worse than market expectations.
“The Fed will have to assess this year whether wage increases are excessive, just enough or too low,” Reis said. “If wage increases are modest, inflation could return to the 2% target very quickly.”
“Inflation would drop to 2 percent in a few years if wages rose in line with productivity without having to raise interest rates that much, but that would be difficult because productivity is a difficult economic variable to measure,” Reis said. Raising the prices of their products creates the risk of a wage and price spiral, to which the Fed could overreact.”
