Dot Plot Implies Federal Reserve Is Nowhere Near Done Yet
Policymakers didn’t just revise up their inflation forecasts; they also seem to think that implied real rates may need to go higher than previously expected.
Fed Chair Jerome Powell is being vague about what constitutes “sufficiently restrictive” rates.
Photographer: Sarah Silbiger/Bloomberg
Federal Reserve policymakers decided to forgo any move in their policy rate Wednesday, leaving the target at 5% to 5.25% to allow time to assess the impact of past monetary tightening. But they are still feeling their way around in the dark to identify the level of rates that will bring down high and stubborn inflation, and the Fed’s Summary of Economic Projections suggests they’re not there just yet.
Notably, the median projection in the so-called SEP — released simultaneously with Wednesday’s rate decision — increased even more for the fed funds rates than it did for projected inflation, implying that the committee sees a need for greater real rates to put sufficient restraint on the economy. A year ago, the Fed thought it could fight inflation by getting policy rates about 1.1 percentage points above projected inflation, but committee members have clearly started to reconsider that. Now, the typical policymaker seems to think that “real rates” will need to be as much as 2 percentage points above inflation in 2024.