Our baseline forecast sees the Fed holding rates at restrictive levels until September next year, before eventually cutting back to the lower bound. Various monetary policy rules are consistent with this view. But should inflation prove stickier, then rates may only return to neutral, rather than a more pronounced easing cycle.

  • We expect the Fed to hike rates by a further 100 bps, with two further 50bps moves in December 2022 and February 2023. But if US economic activity holds up better than we expect around the turn of the year, there is scope for further upward revisions to the terminal rate. 

  • Our forecasts then see the Fed keeping rates elevated until September next year even as the recession starts to bite. 

  • However, once the pace of core inflation has credibly fallen back to a target consistent rate, we see the Fed cutting rates rapidly back to neutral, before cutting to the effective lower bound in 2024.  

  • To test our policy assumptions, we consulted a variety of monetary policy rules. Across a range of policy rule specifications, the “appropriate” path of policy sees rates return to zero. 

  • However, were core inflation to prove more persistent then a shallower cutting cycle is possible. Indeed, if the recent high inflation environment sees the Fed putting a higher weight on achieving price stability in their policy making, rates may only return to the neutral even with much higher unemployment. 

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