US Fed & Interest Rates

[August1991]

The US Fed raised its fed funds target rate to 4.75% today.

Here's a good analysis of what may well happen to US interest rates (and to Canadian rates too):

The Fed achieved a soft landing in the economy in 1995. From late 1994 through mid-1998, the Fed managed to keep the fed funds rate relatively steady between 5.25% and 6%. The economy prospered, growing at an average rate of 3.7%. Inflation averaged 2.5%.

During that time, the real fed funds rate averaged 3.1%, two full percentage points higher than today.

This analysis suggests that, in a period of high productivity and high growth, it may take a somewhat higher real funds rate to keep inflation low.

If the Fed wants a 3.1% real funds rate, it might have to boost nominal rates another 2 percentage points to 6.75%. The Fed probably wouldn't have to do all eight quarter-point hikes, because that much tightening would probably have some impact on lowering the inflation rate (otherwise, why do it?).

If inflation rates moderated to 2.5% or so under the pressure of Fed tightening, the Fed could probably stop at 5.50%.

Link

That makes sense to me. A 3/4% increase in the States over the next few months or so, and then no changes except for adjustments based on new shocks.

[JerrySeinfeld]

The US Fed raised its fed funds target rate to 4.75% today.

Here's a good analysis of what may well happen to US interest rates (and to Canadian rates too):

The Fed achieved a soft landing in the economy in 1995. From late 1994 through mid-1998, the Fed managed to keep the fed funds rate relatively steady between 5.25% and 6%. The economy prospered, growing at an average rate of 3.7%. Inflation averaged 2.5%.

During that time, the real fed funds rate averaged 3.1%, two full percentage points higher than today.

This analysis suggests that, in a period of high productivity and high growth, it may take a somewhat higher real funds rate to keep inflation low.

If the Fed wants a 3.1% real funds rate, it might have to boost nominal rates another 2 percentage points to 6.75%. The Fed probably wouldn't have to do all eight quarter-point hikes, because that much tightening would probably have some impact on lowering the inflation rate (otherwise, why do it?).

If inflation rates moderated to 2.5% or so under the pressure of Fed tightening, the Fed could probably stop at 5.50%.

Link

That makes sense to me. A 3/4% increase in the States over the next few months or so, and then no changes except for adjustments based on new shocks.

If oil stays high I can see rates climbing higher than even that to curb inflation

[geoffrey]

Oil would have to continue increasing, not just staying high for what your saying. We are already passed hedged supplies now and we are paying full price for oil.

I'm prediciting rates will balance out at about 6.25% in the States and 5.75% in Canada, over the course of six and nine months respectively. I doubt if inflation will be curbed enough to actually directly decrease the real interest rate in the short run. So if you want to curb that inflation in the short(which we shouldn't be so darned concerned about), then we're going to have to rely primarily on the nominal rate and not anti-inflationary pressues.