Even if we consider the official CPI of 8.3 percent, the real rate is -5.15 percent. As for the FFR, the Fed started raising it in December 2015 (but went back to cutting it in H1 2019). The Fed began to shrink its balance sheet in late 2017 (and went back to expanding it in September 2019). In the last rate hike cycle, the Fed was not only raising rates, but also shrinking its balance sheet at a higher pace, which further limited the extent to which the Fed could raise rates (since the sale of assets held by the Fed made its prices go down and its interest go up). Does this mean the Fed can continue raising rates without consequences? Unlikely. The FFR reached 2.4 percent again last July and now it stands at 3.15 percent.
In December 2018, there was significant turbulence in the US stock market (and started cutting rates in 2019), and in September 2019 there was a crisis in the repurchase market and the Fed started to inject liquidity into it (doing QE and expanding its balance sheet). The peak of the FFR in the last rate hike cycle (2015-2018) was 2.4 percent. It also stated that it is determined to bring the CPI back to the 2 percent target and it is committed to continue raising rates by 0.75 percent. However, the Fed said it will continue to reduce its assets, as announced in May. And, between the peak reached on April 13 and September 21, it shrunk by “only” $148.7 billion. And, so far, this is what has happened.Īs in Chart 1, by the end of July, the Fed's balance sheet had barely shrunk (the Fed's assets were down by less than 1 percent). Jerome Powell stated in March that, if necessary (to contain the CPI), the FOMC would resort to hikes higher than 0.25 percent in future meetings.
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