November 16, 2021

Interest rates could rise to 3-4%, ex-Fed Reserve Bank presidents say

 The US stock market indexes continue their uptrend, almost reaching their all-time highs. Investors proceed with buying equities while ignoring all economic news, which is another sign of a bubble. More and more experts have given warnings of an inevitable market crash lately, but it has not happened so far. Rising inflation, which reached 6.2% year-on-year in October, has led to speculation about the measures the Fed would take against it in the near future. The Federal Reserve is expected to wind down the bond-buying policy and hike the interest rate sooner, which could boost the dollar. The greenback has been climbing against the euro and the pound sterling throughout 2021. The USD rally has been accelerated by high market expectations of monetary tightening.


In an interview to Bloomberg, former Fed Reserve Bank presidents William Dudley and Jeffrey Lacker said they expect the Fed to raise the interest rates to at least 3% to keep inflation in check. Dudley, an ex-president of the Federal Reserve Bank of New York, thinks that the hike would begin in June or somewhat later, going up higher than expected. According to the consensus, the official funds rate will be put on hold at 1.75% in the next few years. He added that long-term forecasts are not feasible in the current conditions. Former Richmond Fed president Jeffrey Lacker said that the interest rates could reach 3.5-4.0%, which could push the economy into a recession. Both Dudley and Lacker stated the Fed should speed up the reduction in its asset purchases to stop the accelerating inflation. In terms of monetary policy, the two former Reserve Bank presidents did not see any difference between Fed chair candidates Jerome Powell and Lael Brainard. A rise in interest rates as described by Dudley and Lacker would put pressure on the stock market, pushing stocks and indexes down. As the Fed is beginning to taper QE, investors do not voice any concerns regarding it. Nevertheless, experts warn that a huge correction and even a market crash could follow in the upcoming months.