“It’s natural for ordinary investors to wonder when these interest rate hikes will stop: The ‘terminal rate’ – the peak of this rate cycle – may still be a long way off

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The economy is somewhere in the saga of the Federal Reserve raising interest rates to tame inflation, but people already want to know where the story ends.

It’s what’s being discussed when economists, policymakers and investors talk about the “terminal rate” – and the focus on the end game will only continue as the rate hikes pile up.

On Wednesday, the Fed made the fourth straight increase in a key benchmark interest rate, a three-quarters percentage point increase that mirrors a similarly large increase in June. This is the fastest rate of tightening since 1981, and the central bank has announced more increases to come.

Technically, the terminal rate is defined as the high point where the benchmark interest rate – the federal funds rate – will stop before the central bank begins to cut it.

The terminal rate is defined as the high point where the benchmark interest rate – the federal funds rate – will stop before the central bank begins to cut it.

This terminal rate is not just a number, but a planning point for an uncertain time, experts say. That’s because the federal funds rate has all kinds of financial consequences. For households, the rate can directly or indirectly influence rates for credit cards, savings accounts, car loans and mortgages.

Here’s the catch: It’s still an open question how far the Fed should go with rate hikes and when.

This complicates the decisions people have to make if they’re considering big-ticket purchases like cars and homes.

So what about the specter of another recession? US Federal Reserve Chairman Jerome Powell said on Wednesday that he not believe the US economy is in a recession right now.

In June, the members of the Fed penciled in the objective of bringing the key rate to close to 3.5% this year and close to 4% next year. The latest rate increase brings the range to 2.25% to 2.5%.

In June, the members of the Fed penciled in the objective of bringing the key rate to close to 3.5% this year and close to 4% next year. The latest rate increase brings the range to 2.25% to 2.5%.

At Wednesday’s press conference, Powell pointed out that the Fed was essentially writing in pencil — not carved in stone — the goal of reaching 3.5% by year-end.

“So where are we going with this?” I think the [Federal Open Market Committee] generally feels that we need to take the policy to at least a moderately restrictive level,” Powell said, later adding that the “moderately restrictive” turn of phrase could translate to “somewhere between 3% and 3.5%.”

Powell declined to say where he personally thinks the rate should land, but he noted the Fed will have updated projections at the September meeting — once it digests more economic data.

The ultimate goal is to achieve inflation rates of around 2%, Powell said.

The various gauges of inflation and the general mood of consumers towards high costs show that there is a long way to go.

In June, the cost of living rose 9.1% year over year, according to the Bureau of Labor Statistics consumer price index. The Fed’s preferred inflation reading showed a 6.3% rise in May.

In June, the cost of living rose 9.1% year over year, according to the Bureau of Labor Statistics consumer price index. The Fed’s preferred inflation reading showed a 6.3% rise in May.

From a planning perspective, there are a variety of reasons why it would be helpful to know how far the Fed will go with its terminal rate, said economist Mark Witte, a professor at Northwestern University.

For example, a potential buyer may want to know what mortgage rates they will face if they buy a home now or if they wait for rates to drop.

It is an “unreasonable expectation” to believe that the central bank can telegraph the sequence of events, Witte added.

There are still so many question marks, he noted – like what the BA.5 omicron COVID-19 sub-variant will mean for the economy or how Russia’s invasion of Ukraine will continue. affect crude oil prices. “There are many things that will become known that are unknowable now,” he said.

The stock markets ended sharply higher on Wednesday, following the Fed’s announcement. Despite deep slippages since the start of interest rates in March, equity markets have performed strongly on days when the Fed announced interest rate hikes.

For people looking at their own portfolios and budgets, it’s important for people to understand general economic conditions without losing sight of their own financial capabilities and plans.

“It’s natural for ordinary investors to wonder when these interest rate increases will stop,” said Katie Perry, chief innovation officer of investor relations at investing platform Public.com.

Still, she later added, “It’s less about planning for a potential future event and more about understanding the reasoning behind Fed rate hikes, the implications on the economy, and making sure your portfolio matches your risk tolerance and personal goals.”

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