Fed’s record of tightening monetary policy without causing a recession ‘not great’

This from Moody’s analysts at the Federal Open Market Committee (FOMC) meeting this week, and what lies beyond.

  • U.S. Consumer Price Index for August changes Federal Reserve’s calculation, which is now expected to raise the target range for the fed funds rate by 75 basis points
  • Financial markets are fully pricing in a 75 basis point rate hike this month and put the odds of a 100 basis point hike at 25%.
  • It’s pretty clear that the Fed is going to accelerate rate hikes more than in our September baseline scenario and the terminal rate, or peak federal funds rate of this cycle, will also be higher. The forward base forecast will take into account a rate hike of 50 basis points in November (previously 25 basis points) and maintain a 25 basis point hike in December. This would imply that the target range for the fed funds rate would likely be between 4% and 4.25%.

Moody’s concludes on this pessimistic note. It’s hard for me not to agree with them:

  • All in all, there is a significant risk that inflation will stay higher for longer, as traditional monetary policy tightening is not equipped to deal with the supply shocks that push inflation higher in the US. United. , as in one of our scenarios, to tame inflation, or wait and cause a deeper recession, since a stagflation scenario is possible next year if the Fed is not aggressive enough.
  • The Fed’s track record of tightening monetary policy without causing a recession is not great.

Good luck with that.



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