In a bid to fight soaring inflation, the Federal Reserve has increased the federal funds rate 11 times since March 2022 to its highest level since 2001. A benchmark determining the interest rates of mortgages, credit cards and other types of loans, the federal funds rate also affects the yields of government bonds such as the 30-year and 10-year Treasury bills.
Despite inflation cooling down in recent months, the Fed signaled at its latest monthly meeting that interest rates would stay elevated for longer than previously thought, leading many experts to anticipate at least one more rate hike before the end of the year.
The central bank’s goal is to bring inflation down without stifling economic activities, such as consumer spending and business investment. To strike a balance between the two is tricky, and opinions on how much monetary policy tightening is too much divide economists and investors. When will the Fed stop raising interest rates? And where is the U.S. economy headed?
Here’s what bank CEOs, hedge fund billionaires and central bank officials are saying about Fed hikes
Jamie Dimon, CEO of JPMorgan Chase
The CEO of the nation’s largest bank believes it’s possible the Fed will increase rates by another 1.5 percent to 7 percent, he told Bloomberg on Oct. 2. If true, the federal fund rate will reach its highest level in 33 years. Dimon gave the same outlook in an interview with the Times of India on Sept. 26, warning that the world might not be prepared for a 7 percent interest rate.
“We may have a soft landing, we may have a mild recession, we may have a harder recession,” Dimon said of the economy in his interview with Bloomberg.
“The consumer is still in good shape,” Dimon said, but there are many “potential bad outcomes,” the worst of which would be stagflation, an environment of persistent high-interest rates and low growth. If that happens, “you’re going to see a lot of people struggling,” Dimon predicted.
Brian Moynihan, CEO of Bank of America
Bank of America (BAC) CEO Brian Moynihan says the Fed has achieved its near-term goal of taming inflation, but interest rates are likely to stay high for longer.
“They’re winning the fight right now” against inflation, Moynihan told the Economic Club of New York on Sept. 27. “They caught up fast, but now they’ve got the equal, opposite problem to be careful they don’t go too far.”
Moynihan is more optimistic than Dimon and believes the economy is headed toward a soft landing and can avoid a recession.
Bill Ackman, founder of Pershing Square
Hedge fund billionaire Bill Ackman believes interest rates have peaked. “The Fed is probably done. I think the economy is starting to slow. The level of real interest rates is high enough to slow things down,” he told CNBC on Oct. 2.
“High mortgage rates, high credit card rates, they’re starting to really have an impact on the economy,” Ackman said. “The economy is still solid, but it’s definitely weakening. Seeing lots of evidence of weakening in the economy.”
However, Ackman predicts yields on long-term Treasury bills could continue to rise. When bond yield rises, its price falls. Ackman’s Pershing Square has a short position on 30-year T-bills, betting government bond prices will fall.
Ackman recently predicted long-term U.S. inflation would stay at around 3 percent, higher than the Fed’s goal of 2 percent.
Ray Dalio, founder of Bridgewater Associates
Ray Dalio predicts the 10-year Treasury yield could rise beyond the 5 percent threshold as he sees both inflation and interest rates remaining elevated.
“It would seem that something like a 5 percent rate, and there’s nothing precise about that, but in that neighborhood,” Dalio said on Oct. 3 at the Greenwich Economic Forum in Connecticut. That day, the 10-year Treasury yield stood at 4.76 percent, the highest level since 2007.
Like Ackman, Dalio believes inflation will stay above 3 percent for a while—3.5 percent, to be exact. “It doesn’t look like 2 percent to me without a lot of pain,” Dalio said. “That’s also why the Fed is having its interest rates where it is.”
Neel Kashkari, president of the Minneapolis Federal Reserve
Minneapolis Fed president Neel Kashkari believes there is a fair chance the central bank will need to raise interest rates “meaningfully higher” in order to bring down inflation.
In an essay titled “Policy Has Tightened a Lot. Is It Enough?” posted on Sept. 26, Kashkari wrote the U.S. economy is likely headed toward a “high-pressure equilibrium” where consumer spending continues to grow and inflation remains high.
“The case supporting this scenario is that most of the disinflationary gains we have observed to date have been due to supply-side factors, such as workers reentering the labor force and supply chains resolving, rather than monetary policy restraining demand,” Kashkari wrote. “Once supply factors have fully recovered, is policy tight enough to complete the job of bringing services inflation back to target? It might not be, in which case we would have to push the federal funds rate higher, potentially meaningfully higher.”
“Today, I put a 40 percent probability on this scenario,” he predicted.
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Read the original story When Will the Fed Stop Rate Hikes? Dimon, Ackman, Dalio May Have Reached a Consensus and others by Sissi Cao at Observer.
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