After Inflation: The Timeline of Falling Prices and Interest Rates - NerdWallet

After Inflation: The Timeline of Falling Prices and Interest Rates – NerdWallet

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Suppose the Federal Reserve knows what it is doing.

The central bank slows the economy with a series of painful measures interest rate increases. Its goal: to reduce the current 8.3% year-over-year rise in consumer prices, bringing them back to the Fed’s 2% target.

With five such interest rate hikes under our belt this year, many of us may be wondering: what’s next?

Prepare for another year of high interest rates – and prices

Most analysts agree – and Fed Chairman Jerome Powell has said so – that interest rate hikes still have a long way to go. Short-term rates are currently hovering around 3% and the Fed is targeting 4% to 4.5%, so further rate hikes will likely continue through early 2023.

“Although higher interest rates, slower growth and weaker labor market conditions will reduce inflation, they will also hurt households and businesses,” Powell told a symposium on the economic policy on August 26. “These are the unfortunate costs of reducing inflation.”

So when is it better?

Here’s how things should go as we eliminate inflation from the economy:

Until the end of 2022

Expect two more interest rate hikes from the Fed, in November and December.

This means that the cost of money for buying a house and refinancing is likely to become more expensive until inflation subsides. Although current 30-year mortgage rates of around 6% are below the half-century average of almost 8%, we are unlikely to see a much larger drop in the next 12 to next 18 months.

In 2023

There will likely be another interest rate hike next year – and at that time the Fed could stand still, seeing how tighter money supply affects the economy and, importantly, prices at the end of the day. consumption.

After a long period of solid job growth as the pandemic wanes, employment will slow. There will likely be layoffs and business cutbacks. We will speak less of “the big resignation” or “to stop quietly”.

Doug Duncan, chief economist of Fannie Mae, a government-sponsored company that fuels financing for the residential mortgage market, is an important voice in the crowd sounding the recession alarm. He expects a “moderate recession beginning in the first quarter of 2023”.

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In 2024

A September CNBC survey of analysts, economists and fund managers found most believe that by 2024 inflation will have fallen near the Fed’s 2% target.

If so, we will benefit from lower prices for groceries, consumer goods, and the cost of living in general. However, we will also likely experience higher unemployment and a sluggish economy.

Once the Fed hits its 2% inflation target, it will begin to cut interest rates to revive the economy.

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

These scenarios are based on a “just right” economic response to the Fed’s interest rate action. Of course, as our times of pandemic prove: there are many unknowns that can spoil even the best-laid plans.

What could go wrong? The Fed could lock in the economy with higher interest rates, but consumer costs could also be locked in – not falling at all. It’s called stagflation.

In other words, the Fed’s Powell would be looking for a ride to its next stop.

What does this mean for your financial decisions?

We do not live our lives according to a macroeconomic plan. We fall in love, have babies, buy houses and get new jobs, all by unknown forces. So the Fed will do its job – and you should do yours.

Try to do financial decisions under optimal circumstances is a ticket to Misery Bay, Michigan. What you can do is:

  • Do not aggravate a dubious financial situation, for example by assuming too much debt.

  • Understand that a good idea today will be a good idea tomorrow. Rushed decisions are often carried out in false delays.

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