Today, the Federal Reserve raised its benchmark federal funds rate by another 25bps (aka 0.25%).
In case you haven’t been watching closely - since March 2022 this is the 10th increase in a row.
With today’s hike, the underlying interest rate on which nearly all (US) lending is based went from 5% to 5.25%.
This is the highest level in more than 15 years.
It's true that US inflation is still way over its 2% target. Indeed, at ~5% inflation is a hefty double+ over target!
The Fed keeps raising rates to try and tame inflation. The gagillion dollar question is whether it will work.
As you might have come to expect - our view is nuanced.
We feel it has been working but with the hikes this year the Fed is most likely in overshoot territory.
Inflation was nearly 10% a year ago. So, it’s clear the Fed has done a lot to tame the beast.
However, at this point - or since about last November to be more precise - higher interest rates have probably been in “restrictive” territory. That is economist-speak for “too tight” rather than “just right.”
Our view is that given today’s economy, 2% is probably just too low a target rate - and it’s causing the Fed to over-tighten. (The number of reasons we feel 2% is too low is deserving of its own Quish Insight, so stay tuned.)
In this case, the medicine - that is these crazy-high rates - might turn out to be worse than the disease - inflation.
