After inflation: the timeline for lower prices and interest rates

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Let’s say the Fed knows what it’s doing.

The central bank slows the economy with a painful streak interest rate increases. Its goal: to reduce the current rise in consumer prices by 8.3% year-on-year, bringing it down to the Fed’s target of 2%.

With five such rate hikes this year, many of us may be wondering: What next?

Get ready for another year of high interest rates – and prices

Most analysts agree – as Federal Reserve Chairman Jerome Powell said – that rate increases still have a long way to go. Short-term rates are currently around 3% and the Fed is targeting 4% to 4.5%, so additional rate increases are likely to continue into early 2023.

“While higher interest rates, slow growth, and weak labor market conditions will bring down inflation, they will cause some pain for households and businesses,” Powell said at an economic policy seminar on August 26. inflation.”

So when do you get better?

Here’s how things are expected to play out while we remove inflation from the economy:

Until the end of 2022

Look for two additional rate hikes by the Fed, in November and December.

This means that The cost of money to buy a home and refinance It will likely become more expensive until inflation abates. While current 30-year mortgage rates of about 6% are below the half-century average of about 8%, we are unlikely to see much less turnaround over the next 12 to 18 months.

in 2023

There will likely be another rate hike next year — at which point the Fed may stand idly by, seeing how the tight money supply affects the economy and, more importantly, consumer prices.

After a long period of strong job growth as the pandemic subsides, there will be fewer jobs. There will likely be layoffs and corporate cutbacks. There will be less talk of a ‘grand resignation’ or a ‘quiet resignation’.

One significant voice in the crowd sounding the recession alarm is Doug Duncan, chief economist at Fannie Mae, a government-sponsored company that finances the mortgage market. He expects a “moderate recession starting in the first quarter of 2023.”

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in 2024

A September CNBC survey of analysts, economists and fund managers reveals that most believe that by 2024 inflation will fall close to the Fed’s 2% target.

If so, we would enjoy lower prices for groceries, consumer goods, and the general cost of living. However, we are also likely to see a rise in unemployment and a faltering economy.

Once the Fed reaches its 2% inflation target, it will start cutting interest rates to revitalize the economy.

It’s like driving your car in the middle of the desert until you run out of fuel – then hoping to find a gas (or electric) station to refuel the engine and restart it. This is how monetary policy is supposed to work.

These scenarios are based on an “absolutely correct” economic reaction to the Fed’s rate move. Of course, as our pandemic times prove: there are plenty of unknowns that can spoil the best laid plans.

What can go wrong? The Fed may halt the economy as interest rates rise but consumer costs may also be stuck – not moving lower at all. it’s called Inflation accompanied by economic stagnation.

In other words, Fed Chair Powell was looking forward to moving on to his next stop.

What does this mean for your financial decisions?

We don’t live our lives according to a macroeconomic plan. We fall in love, have children, buy homes and get new jobs, all at the whim of unknown powers. So the Fed is going to do its job – and you have to do your own thing.

I try to do financial decisions Under optimal conditions a ticket to Misery Bay, Michigan. What you can do is:

  • Don’t make an unfavorable financial situation worse, like moving forward a lot of debt.

  • Understand that a good idea today will be a good idea tomorrow. Urgent decisions They are often made under the wrong deadlines.

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