Fear that U.S. inflation expectations are on the brink of coming unanchored is having an “exponentially powerful” impact on Federal Reserve policy makers and driving their urge to preempt such a scenario with higher interest rates.
That’s the view of the research team led by former Fed Governor Larry Meyer, which concludes that the Fed’s Summary of Economic Projections in September may flick at a higher endpoint for the central bank’s rate-hike campaign, at 4% or higher in 2023, and no rate cuts until after 2024.
Below is a chart of hypothetic paths for the Fed’s policy rate target, based on where various policy makers likely envision interest rates going. “The Fed doesn’t know how to bring down inflation expectations and doesn’t know where inflation expectations are going. They’re a little wobbly, but haven’t come unanchored,” Tang told MarketWatch. Still, he said, Fed officials “feel they’re getting closer to that point and closer to the edge, but they don’t know where the edge is. So the more they have to act.”
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