The Federal Reserve is gradually raising interest rates from historic lows. While the central bank is potentially taking a breather to assess the data and give the stock market a break, the Eccles Building is moving ahead with rate hikes – they’ll be more aggressive when inflation hits.
But not everyone thinks the Fed is normalizng monetary policy.
Writing in its annual outlook report on Monday, the Congressional Budget Office (CBO) is projected to slash interest rates in 2023. After the Fed raises rates, the Eccles Building will freeze the target range and then begin to cut the federal funds rate in a few years.
The CBO writes:
“In CBO’s projections, the federal funds rate rises from 2.2 percent in late 2018 to 3.4 percent by the beginning of 2020, where it remains through 2022. The agency expects the Federal Reserve to then begin reducing the federal funds rate in 2023 as the output gap becomes more negative and inflationary pressures dissipate. The federal funds rate is expected to fall to 3.1 percent by the end of 2023.
In CBO’s projections, interest rates decline slightly in 2024 and 2025. The expected decline in 2024 primarily reflects a continued response to the slowdown in growth (and decreasing inflationary pressure) during the previous three years, whereas the expected decline in 2025 primarily reflects anticipated changes in monetary policy.”
The Fed’s benchmark target rate range is 2.25 percent to 2.5 percent.
The Federal Open Market Committee (FOMC) is scheduled to meet this week, but the market does not anticipate a rate hike. In fact, the market isn’t penciling a rate hike until the end of the year.
This comes as private sector surveys have found that the market expects rate cuts next year because of a sluggish economy.
Was Peter Schiff right after all?
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