Why the Fed May Have Further to Go

The Federal Reserve's recent quarter-point interest rate hike signals a shift in monetary strategy, as policymakers view current conditions as accommodative rather than restrictive. This distinction suggests that raising rates is an act of "easing off the gas" rather than "pressing the brakes," potentially leading to further hikes in December and March to reach a target range of 4.5%. This hawkish outlook is driven by robust corporate earnings and loan growth, alongside persistent inflation that remains above the 2% target. Geopolitical instability and high energy prices further complicate the landscape, with concerns that fuel costs are triggering second-round effects in sectors like air travel. Additionally, an upward revision of the long-run neutral interest rate to 3.25% implies that current rates have less of a dampening effect on economic growth than previously estimated, leaving the door open for sustained tightening through 2027.