Survey: Fed interest rates set to peak at 15-year high

The Federal Reserve is expected to raise interest rates to the highest level since 2007 in its intense quest to combat the biggest price spike in four decades, according to the nation’s top economists.

Experts polled for Bankrate’s third-quarter economic indicators survey say policymakers’ key federal funds rate – which acts as leverage for virtually all consumer borrowing costs in the economy – will reach 4 .71%, reflecting a target range of 4.5 to 4.75%. Rates were last at this level between October and December 2007, near the start of the financial crisis.

These measures could also help keep another key borrowing benchmark – the 10-year Treasury yield – high a year from now. The average forecast by economists in the Bankrate poll puts the interest rate at 3.79% by September 2023, the highest since 2010.

The 10-year interest rate influences the 30-year fixed rate mortgage, and a higher yield could mean that higher home buying costs will persist in the future. The average rate for the most common home loan has more than doubled since the start of the year and approached 7% in a national Bankrate survey for the week ending September 28.

“The good news is that you can enjoy some of the best returns on savings in years, with higher payouts for those who shop wisely,” says Mark Hamrick, senior economic analyst at Bankrate. “Savers are finally seeing a reset, with more generous returns being paid due to rising rates. With most Americans still living paycheck to paycheck, now is the time to get involved.

Forecast and analysis:

What the Fed’s fastest rate hikes in 40 years mean to you

Economists’ estimates are in line with what even Fed officials expect. Six officials in the US central bank’s September projections forecast a peak interest rate of 4.5-4.75%, where policymakers would need to raise interest rates in 2023 before keeping them high to calm inflation.

But the future doesn’t always turn out as expected, even for the Fed. An equal number of Fed officials also forecast interest rates of 4.25-4.5% and 4.75-5% in 2023, as well as one that saw a rate of 3.75-4 %, policymakers’ projections show. Bankrate survey participants had an even wider range, ranging from a low of 4-4.25% to a high of 5.75-6%.

The Fed’s path ultimately depends on what happens with inflation, which has already shown signs of warming beyond high gasoline and energy prices. Rents have risen at the fastest rate since April 1986, while services such as medical care, vehicle repair and out-of-home food have soared the most since 1982. Falling gasoline prices have contributed to easing headline inflation for the third month, but core prices excluding this volatile category jumped 6.3% from a year ago.

Inflation, once considered transitory due to supply factors associated with the pandemic, is now lasting longer than any official ever expected. That’s even with a remarkable 3 percentage point increase in rate hikes in just six months, the fastest pace since the early 1980s. At the time, Chairman Paul Volcker pushed the Fed to raise the rate from 14% to about 20%.

The implications for the economy are strong. The Fed has an idea of ​​where interest rates might start to dampen economic growth — the so-called “neutral interest rate” — but even then, those estimates are illusory. It is estimated to be around 2.5%, but inflation has been more than three times higher since the start of the year. Not to mention that the Fed only raised interest rates for the first time after the coronavirus pandemic in March 2022, when inflation had already exceeded 8.5%.

Faced with the prospect that it might have taken too long to start pulling the stimulus out of the economy, officials have to wait knowing that their interest rate decisions take some time to trickle down to the rest. economy. It’s just another layer that complicates the Fed’s job, increasing the risk that it will overdo it.

Hear from the experts

Methodology

The Third Quarter 2022 Bank Rate Economic Indicators Survey of Economists was conducted from September 22 to September 29. Survey requests were emailed to economists across the country, and responses were voluntarily submitted online. Responding were: Ryan Sweet, senior director of economic research, Moody’s Analytics; Yelena Maleyev, Economist, KPMG LLP; Odeta Kushi, Deputy Chief Economist, First American Financial Corporation; Lawrence Yun, Chief Economist, National Association of Realtors; Robert Hughes, Senior Research Professor, American Institute for Economic Research; Mike Fratantoni, Chief Economist, Mortgage Bankers Association; Bernard Baumohl, Chief Global Economist, The Economic Outlook Group; Scott Anderson, Executive Vice President and Chief Economist, Bank of the West; Bernard Markstein, President and Chief Economist, Markstein Advisors; Mike Englund, Chief Economist, Action Economics; John E. Silvia, Founder and President, Dynamic Economic Strategies; Robert Frick, Business Economist, Navy Federal Credit Union; Joel Naroff, President, Naroff Economics; and Robert Brusca, Chief Economist, Fact And Opinion Economics.

Carol N. Valencia