Survey: Fed’s inflation fight will take interest rates to highest since 2007

The Federal Reserve is expected to lift interest rates to the highest level since 2007 in its intense quest to battle the hottest price surge in four decades, according to the nation’s top economists.

Experts surveyed in Bankrate’s Third-Quarter Economic Indicator poll say policymakers’ key federal funds rate — which acts as a lever for basically all consumer borrowing costs in the economy — will top out at 4.71 percent, reflecting a target range of 4.5-4.75 percent. Rates were last at that level between October and December of 2007, near the start of the financial crisis.

Those moves could also help keep another key borrowing benchmark — the 10-year Treasury yield — at an elevated level a year from now. The average forecast among economists in Bankrate’s poll put the interest rate at 3.79 percent by September 2023, among levels not previously seen since 2010.

The 10-year interest rate influences the 30-year fixed-rate mortgage, and a higher yield could mean more expensive home-buying costs will persist into the future. The average rate on the most common home loan has more than doubled since the start of the year and approached 7 percent in a national Bankrate survey for the week that ended on Sept. 28.

“The good news is that one can enjoy some of the best returns on savings in years, with higher payoffs for those who wisely shop around,” says Mark Hamrick, Bankrate senior economic analyst. “Savers are finally seeing a reset, with more generous returns being paid because of rising rates. With most Americans still living paycheck to paycheck, now is the time to make a commitment.”

Forecast and analysis:

• Experts see massive hiring slowdown and surging unemployment a year from now
• The Fed’s interest rate will top 4.71 percent, the highest since 2007
• 43 percent of economists say inflation hasn’t yet peaked 
• Odds of a U.S. recession by middle of 2024 now at 65 percent

What the Fed’s fastest rate hikes in 40 years mean for you

Economists’ estimates are in line with what Fed officials themselves are expecting. Interest rates are expected to peak at 4.5-4.75 percent in 2023, according to the U.S. central bank’s median projection in September.

But the future doesn’t always unfold the way anyone expects — even for the Fed. An equal number of Fed officials also penciled in interest rates of 4.25-4.5 percent and 4.75-5 percent in 2023, along with one who saw a 3.75-4 percent rate, policymakers’ projections show. Bankrate’s survey participants had an even wider range, from a low of 4-4.25 percent to a high of 5.75-6 percent.

The Fed’s path ultimately depends on what happens with inflation, which has already shown signs of heating up beyond expensive gasoline and energy prices. Rents rose at the fastest pace since April 1986, while services such as medical care, vehicle repair and food away from home skyrocketed by the most since 1982. Falling gasoline prices helped take the edge off headline inflation for the third month, but core prices excluding that volatile category along with food surged 6.3 percent from a year ago.

Inflation, once deemed transitory because of supply factors associated with the pandemic, has now lingered for longer than any Fed official initially expected. That’s even with a remarkable 3 percentage points’ worth of rate hikes in just a six-month span, the fastest pace since the early 1980s. Back then, Chair Paul Volcker steered the Fed to lift rates from 14 percent to about 20 percent.

The implications for the economy are stark. The Fed has an idea of where interest rates could start to slam the brakes on economic growth — the so-called “neutral rate of interest” — but even then, those estimates are illusive. It is believed to be about 2.5 percent, but inflation has been more than three times higher than that since the start of the year. Not to mention, the Fed didn’t hike interest rates for the first time after the coronavirus pandemic until March 2022, when inflation had already topped 8.5 percent.

Facing the prospect that it might’ve waited too long to start taking stimulus away from the economy, officials also know each rate hikes take a while to filter through to the rest of the economy. It’s just another layer making the Fed’s job complicated, raising the risk it could do too much.

Hear from the experts

Fed officials signaled in their September projections their intention of continuing to hike interest rates until the federal funds level hits a terminal rate of 4.6 percent in 2023. Further increases in the federal funds rate will continue to curtail demand, which will have a negative impact on interest rate-sensitive sectors, such as housing, and indirectly on the labor market.

— Odeta Kushi, deputy chief economist, First American Financial Corporation

The Fed will be forced to raise rates higher than they currently expect in order to squeeze inflation out of the system. It is hard to see how that doesn’t lead to a recession.

— Joel Naroff, president, Naroff Economics LLC

The Fed has historically found it difficult to achieve a soft landing, as policy tightening usually overshoots.  Yet, we don’t think the Fed has pushed rates into danger territory yet, and we assume for now that the Fed will pause at the right time.

— Mike Englund, chief economist, Action Economics

Methodology

The Third-Quarter 2022 Bankrate Economic Indicator Survey of economists was conducted Sept. 22-29. Survey requests were emailed to economists nationwide, and responses were submitted voluntarily online. Responding were: Ryan Sweet, senior director of economic research, Moody’s Analytics; Yelena Maleyev, economist, KPMG LLP; Odeta Kushi, deputy chief economist, First American Financial Corporation; Lawrence Yun, chief economist, National Association of Realtors; Robert Hughes, senior research faculty, American Institute for Economic Research; Mike Fratantoni, chief economist, Mortgage Bankers Association; Bernard Baumohl, chief global economist, The Economic Outlook Group; Scott Anderson, executive vice president and chief economist, Bank of the West; Bernard Markstein, president and chief economist, Markstein Advisors; Mike Englund, chief economist, Action Economics; John E. Silvia, founder and president, Dynamic Economic Strategies; Robert Frick, corporate economist, Navy Federal Credit Union; Joel Naroff, president, Naroff Economics; and Robert Brusca, chief economist, Fact and Opinion Economics.