There is a good chance it will keep them high for longer than investors expect
the start of June investors and analysts believed that a “jumbo” interest-rate rise for the Federal Reserve meant half a percentage point. How quaint. After four straight increases of three-quarters of a percentage point—the latest on November 2nd—perceptions have changed. Indeed, a stockmarket rally in the two weeks before the announcement was rooted in the belief that the Fed may scale down to a half-point rate increase at its next meeting in December. What was once jumbo is now moderate.
But the focus on the size of the rise is also too narrow. As Mr Powell notes, the Fed’s tightening of monetary policy can be looked at in three dimensions: how quickly it raises rates, how high it raises them and how long it then keeps them there. The first dimension is already clear. Although the Fed was late in launching its rate-rise cycle, it has moved with alacrity since starting, raising short-term borrowing rates from 0% in March to 3.75% now—its most aggressive increase in four decades.
The biggest uncertainty surrounds the final dimension. How long will the Fed need to keep rates at a restrictive level? It estimates that the long-term neutral level—that which is neither inflationary nor stimulative—is about 2.5%. By this yardstick, nominal rates are already in restrictive territory. But in real terms, with inflation, rates remain loose. So the question is when the economy will react to them.
France Dernières Nouvelles, France Actualités
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