A little recent history here: The Federal Reserve jacked up its benchmark interest rate — the federal funds rate — back in 2022 and 2023, to a high of 5.25-5.5%, in a bid to fight rampant pandemic-era inflation. In the next two years, it reversed course and started cutting rates to stimulate the economy.
The last rate cut, at the Fed’s October meeting, left the rate at 3.75-4%. So, if the federal funds rate cut another 25 basis points at the upcoming December meeting, and if in mid-May Kevin Hassett becomes the Fed’s new chair, where will we be one year from now?
The economists I’ve interviewed predict a range of federal funds rates one year from now. Jay Hatfield at Infrastructure Capital Advisors came in with the lowest estimate, below 3%, which would certainly stimulate the economy.
“Our models show that inflation is contained and likely to decline, particularly as shelter inflation gradually drops down to market rates. And 2.75% is the historical 30-year average of Fed Funds,” Hatfield said.
Economist Joe Brusuelas at RSM predicts a 3% Fed funds rate — a bit below where the Fed itself predicts the rate will be. He thinks rates could also end up higher, though.
“There’s risk to the upside around growth and inflation, which may require the Fed to make a quick U-turn and hike rates,” Brusuelas said. “Which would clearly exacerbate tensions with the White House, regardless of who’s in charge at the Federal Reserve.”
We know the White House would like to see rates much lower, maybe as low as 2%. Kevin Hassett as the new Chair could try to steer the Fed in that direction, but Daniela Hathorn at Capital.com said it wouldn’t be a slam dunk.
“Kevin Hassett is expected to be more pro-growth, but he can’t completely ignore inflation,” Hathorn said.
And, there are other unknowns that make prediction really hard.
“Big changes that could happen at the Fed, in terms of the Supreme Court allowing the president to remove a [Fed] governor,” said Claudia Sahm, a former Fed economist. “I think at the end of the day, the economy’s going to drive where rates go. But it could be a pretty uncomfortable ride.”
And, she said, one thing financial markets don’t like: economic uncertainty.