Hidden Hike

If inflation declines from 4% to 3%, as it’s expected to do over the next six months, and the Fed keeps the Fed funds rate at roughly 5.375%, as the Fed is proposing, the real interest rate will rise from 1.375% today to 2.375% early next year. By simply holding rates steady as inflation falls the Fed will have effectively implemented four 25bps rate hikes! That’s hugely restrictive.