US rates: heading higher
US interest rates are heading higher. Futures markets show the Fed Funds rate above 2% by the end of 2022 and levelling out at 3.25% in mid-2023. To reach that terminal level, the Fed would need to raise the rate by 25bp at each of the next 11 policy meetings. That progression would be slower than the market expects, leading some to suggest that one or more of the rate increases could be 50 not 25 basis points.
The main reason for the expected rise is that US inflation has already risen sharply and could well rise further. Consumer price inflation was 7.9% in February, the highest rate since 1982, and will likely be pushed higher as a result of recent energy and commodity price rises.
Of course, it is hard to reconcile a 2% policy interest rate and an inflation rate nearing 10%. Policymakers, not just in the US, but around the world have explained this apparently anomalous situation by describing high inflation as likely to be temporary or transient. We have sympathy with that view, but there is no doubt that inflation has remained at an elevated level for much longer than many expected. Temporarily higher inflation after extraordinary events has been a feature of the past. Inflation does not generally rise to a new, higher level and stay there: it tends to subside quite quickly.