What If the Fed Has to Take Rates Up to 6%?

The wild ride for the global economy and markets this year is in no small part the consequence of the growing recognition of the scale of the US inflation challenge and the extreme measures the Federal Reserve will be forced to take to bring prices under control. When the Fed began raising rates in March, markets were pricing in a terminal rate of just 2.8%. As of mid-November, that expectation has risen to 5%—matching the forecast Bloomberg Economics set out in July.

Could they be forced to do even more? Absolutely. If the Fed is underestimating the natural rate of unemployment, or if the pandemic has resulted in a significant deterioration in productivity, a terminal rate of 6% could come into view.