I was talking to a friend of mine the other day who’s a real estate developer somewhere in the Midwest. He told me that he and his partners were scrambling to figure out what they’d do if interest rates went all the way to 3. I laughed and said “3%? Think about 8%!” He quickly admitted that they had no plan for such a scenario.
But they do need a plan — as does everyone. I don’t think it’s likely that interest rates will go to 8%, but I do think it’s a nontrivial possibility. Possible enough that people need to be thinking about what they’d do if it happened.
Right now, the federal funds rate is still very close to zero. Markets are expecting a 50 basis point hike at the next meeting, but a slower pace of hikes thereafter. Bloomberg’s survey of economists predicts that rates will peak at a little less than 3% at the end of 2023.
But this is just an average forecast. It doesn’t tell us much about risk. And the risk of rates going much higher is real. It’s a scenario both businesses and investors (and, of course, consumers) need to be at least mentally prepared for.
What would have to happen for rates to hit 8%? Two things. First, inflation would have to fail to go away on its own. And second, modest rate hikes would have to prove insufficient to stem the inflationary tide. I’ll talk about why both of those might happen, but first I want to explain where the scary 8% number came from. I didn’t just pull it out of thin air.
Where did I get the 8% number?
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