Tackle Today: What History Says About Future Rate Hikes
September 20, 2022
«The gap between inflation and interest rates must close.»
We are in a tightening cycle where the Federal Reserve is lifting interest rates to cool inflation. With last week’s CPI print showing price increases still running at 8.3%, investors wonder how high rates will need to rise before finally defeating the inflation monster.
The chart below provides some historical context to answer the question. It shows where the Fed Funds Rate peaked at the end of the past eight tightening cycles going back to 1974. While the absolute level of rates varied each time, one thing was consistent.
The Fed Funds Rate was always higher than the CPI at the end.
Does that mean the Fed Funds rate will top 8% this time!? Nope. But it does mean we have a ways to go before the two readings merge. My guess is that the CPI and Fed Funds Rate meet somewhere in the middle, say 4+%. The CPI makes its way down as rates continue their way up. Of course, this view is hardly unique. It’s what the market is currently pricing in.
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Chart of the Day – Fed Funds Rate and CPI: Is there a long way to go?
After Wednesday’s meeting and the anticipated 75 basis point hike, the green bar will leap from 2.5% to 3.25%. We’ll have to wait for an updated CPI reading next month to see whether the blue bar has started to retreat.
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