August 20, 2024
The war on inflation has been a long-drawn-out affair. From a low of 1.23% during the height of the pandemic in 2020, inflation rose to 4.71% in 2022 and peaked at 8.00% in 2022. During the past 12 months, inflation has averaged approximately 3.0%, a drop of over 100% from the peak of 2022. That is also 50% higher than the Federal Reserve’s stated goal of 2.0%.
Though 50% seems to be a lot, from a numerical standpoint, we have lowered inflation a total of 5.0% from the peak and only have 1.0% to go. Thus, here is the question. Do we need to keep interest rates at their present level to bring inflation rates down one more percent? Today, the Fed’s federal funds rates are between 5.25 and 5.50%. This has pushed the prime rate of lending to 8.50%, mortgage rates to close to 7.0% and credit card rates to over 20%. Quite obviously this is putting a crimp in America’s wallets.
We are not arguing against the goal of continuing to bring inflation down. What we are questioning is whether we need interest rates at the level they were raised to in order to bring inflation down from 8.0%. The Fed lowering rates a percentage point or even more would still be much higher than they were during the pandemic. Yes, we are squeezing the very last drop out of inflation – but perhaps we don’t need to squeeze quite so hard at this point. That is why the markets are predicting that the next Fed meeting will be our first step to more reasonable interest rates.
Source: Origination Pro
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