That’s because no one knows how the fed will behave if rising rates will cause a recession or if 3% interest will be enough and if it does cause a recession, will the fed back off or press onward.. My guess is 3% isn’t going to be enough to drive inflation down materially. I think it will need to be in the 7-8% range if not higher. And that almost certainly will cause a recession. So if I had to guess we’ll have one more year at 10% or higher (after adjusting OER for reality) and then a slow drop off from there but the range of outcomes is quite high
One thing I haven't seen mentioned yet is that inflation is measured year over year, so is VERY unlikely to be anywhere near current levels a year from now - because for us to have similar inflation to now in Spring of 2023, prices would have to go up ANOTHER 8.5+% FROM HERE. That's highly unlikely - because..see below. Much more likely is that we'll be back to 2%'ish by then.
We have 8.5+% inflation today primarily because of 2 things: HUGE ($5 Trillion+) monetary policy - direct checks to households, moratorium on things like rent and loan repayment, child tax credits and all sorts of other "free stuff" from the US Govt. Unfortunately, that was done at pretty much the same exact time that we drastically lowered production of just about everything because of COVID shutdowns.
Econ 101..greatly reduce supply while increasing demand (because most everyone all of a sudden had a LOT more available funds than previously so went out and bought "stuff"), and inflation is going to go bonkers - just as it has.
Fast forward to today..that's all (mostly) done with. No more huge checks to households. Production is ramping back up..supply and demand levels will re-calibrate.
Not only will we not have 8+ (or even 5, 6+%) inflation a year from now, we might even have seen "peak CPI" as many economic indicators are ALREADY indicating the economy is slowing significantly. So, for my own planning purposes, I'm using a 4% 2023 number and even that "could" wind up being high.
I heard it said earlier today that the 2-year Treasury Yield is indicative of what the market believes the terminal Fed Funds rate is going to be. There's compelling evidence of that going back many years/decades. Assuming that's indeed the case, we're "probably" looking at a max FFR of around 2.5% before the Fed "breaks something" in the economy and pivots. At least that's what the bond markets currently believe.
Long term yields (eg: 10 year) are not affected as much by the FFR, but instead reflect economic conditions. That's why when the 10-year rate drops below the 2-year rate, people freak out and think it's basically financial Armageddon and a Recession is coming.
Bottom line - we "could" see CD, MYGA and Treasury yields kick up a little from here..but if anyone's holding out hope that rates will hit 5% or higher (or even 4%), that's not overly likely. What's more likely is that the Fed will never even get to 3% FFR, and that we'll see short-term rates (2-yr) top out somewhere around that level.
(One reason the Fed won't get to even 3% FFR is that the Economy WILL go into a Recession far before that. And they are not going to hike further into a Recessionary environment).
JMHO and I of course don't "have a crystal ball". But there's many years of market history that shows the 2-Year rate is "predictive" of the terminal FFR and decades of history that shows the Fed backs off EVERY. SINGLE. TIME. when the economy starts to break - and break it will, likely somewhere north of 2.5 - 3% FFR...
PS: we also have the reality of
significantly increased Federal debt load over prior hiking cycles. And as someone astutely pointed above - that acts to limit how far the Fed even can THINK of hiking..that's why the "max" increase level (before "something breaks") has for the most part dropped in every past cycle over the cycles prior..
