As expected, the Fed raised rates by 0.25% after the March FOMC meeting. Many people are expecting a pause but the inflation is still running hot. With 6% inflation, the current real interest rate is -1.25% to -1%. We still have a long way to go before reaching a positive real rate environment to really tame inflation. The upcoming recession and the subsequent small rate hikes will definitely help though.
In addition to the rate hike announcement, FOMC also published economic projections by the FOMC members. The median projections for the EOY fed fund rates for 2023, 2024 and 2025 are 5.1%. 4.3% and 3.1% respectively. In other words, the 5% short-term rate most likely will persist through the end of the year. The median projections for the EOY PCE ( personal consumption expenditure) index for 2023, 2024 and 2025 are 3.3%, 2.5% and 2.1% respectively. The January 2023 PCE is 5.4%. The PCE projections seem a bit aggressive as the PCE number has not changed much since November 2022. It worries me that if the PCE doesn’t go down as expected, we might see further rate hikes. However, it’s no doubt the failures of SVB, Signature Bank and Credit Suisse in the past two weeks shocked the financial system and we will likely see severe credit constrictions in the near future, which is deflationary. I truly hope the economic landing is not too hard but I have a feeling that 14 years of zero interest rate environment will not come cheap and we will end up paying a very high price for it.