Interest Rates Are High Enough Already, According to the Chicago Fed

September 6, 2023

Policymakers at the U.S. central bank have been hesitant to declare victory over inflation, preferring a wait-and-see approach to the prospect of additional rate hikes. The Chicago branch of the Federal Reserve, however, says rates are already high enough and that the U.S. economy may be on track for a “soft landing,” meaning bringing inflation back down to the Fed’s 2% target without entering a recession.

In the latest monthly “Chicago Fed Letter,”  economists argue that their economic model shows that the 500 basis points of interest rate increases since March 2022 have already taken a substantial toll on economic output and the impact will continue, suggesting that future rate hikes will not be necessary to bring inflation down.

According to the economists’ model, “the policy tightening that has already been implemented will exert further restraint in the quarters ahead, amounting to downward pressure of about 3 percentage points on the level of real gross domestic product and 2.5 percentage points on the consumer price index level.”

The model forecasts that headline consumer price index (CPI) inflation will fall below 2.3% by the middle of 2024. That would equate to inflation of 2% on the Fed’s preferred personal consumption expenditure (PCE) inflation gauge (which tends to run slightly cooler than CPI), exactly in line with the Fed’s target.

While that “downward pressure” of 3% on GDP may mean an economic slowdown, it would not mean a full-blown recession. The Chicago Fed economists note that “the abatement of inflation occurs without a recession, as real GDP growth remains in positive territory throughout the projection.”

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