The financial system is the bridge between the two, and for banks, mortgage companies and bond funds, estimating the path of inflation and adjusting investments and the price of loans to account for it can make the difference between record profits and bankruptcy - as the failure of Silicon Valley Bank demonstrated. It's an example of how the world occupied by central bankers - where the distinction between "real" inflation-adjusted variables, and "nominal," or in-name-only numbers, is vital - differs from the world where consumers live and eat and buy their homes, where falling rates are falling rates. Under the median projections provided this week, monetary policy actually grows slightly more restrictive next year.īy the end of 2023, the gap between the expected federal funds rate and the expected rate of core personal consumption expenditures inflation is 1.7%.īy the end of 2024 that spread actually widens to 2%, as the interest rate declines but the rate of inflation falls more sharply. consumers, it could play out this way: Mortgage and credit card rates come down at the margin, but not by as much as inflation. ![]() It's an indication of policymakers' determination not to give inflation a chance to rekindle as they pressure it back toward their 2% objective.įor U.S. What projections show "is that as inflation comes down in the forecast, if you don't lower interest rates, then real rates are actually going up," he said.Īnd in fact, that seems to be what many on the Fed intend: A real policy rate of interest that gradually tightens next year even as the "nominal" rate printed in its policy statement declines. ![]() Fed Chair Jerome Powell nodded to it in his Wednesday press conference when he was asked why policymakers would reduce borrowing costs in 2024 even with inflation still above the Fed's 2% target.
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