As expected, the Fed raised FFR (federal-funds rates) by 50 basis points to 4.25% - 4.5% today, a 15-year high. In the press conference, JPow also signaled the future rate increases will probably be smaller 25 basis point increments and will stop when the rates reach around 5%. No surprise here.
For this meeting, they also release economic and rate projections by the FOMC members. The most recent rate projections are higher than the September one. The median projection for the FFR is now 5.1% for 2023 and 4.1% for 2024. This means we are going to see risk free investments yielding close to 5% in 2023 and it will probably be a very difficult year for rate sensitive industries like real estate and manufacturing.
But I do think this tightening is healthy and can clean out over leveraged toxic assets in our financial system and impede unsustainable business growth. I also get to earn 5% on my cash holdings. Some people seem to believe that the Fed will start cutting interest rates aggressively in 2023 because of the rapid slowdown of the economy and liquidity crunch. I disagree. I believe the upward pressure of food, labor and potentially energy prices will keep interest rates elevated. Unless there’s another COVID-19 kind of disaster, I don’t see we are going back to the zero interest rate environment any time soon.