A team of Federal Reserve economists have a troubling message for markets: interest rates could be kept above 5% for much longer than investors are anticipating. Perhaps until 2026.
That is the conclusion of a paper published late last week by Johannes Matschke and Sai Sattiraju, two economists with the Kansas City Federal Reserve Bank. The paper caught the attention of Apollo Global Management Chief Economist Torsten Slok, who mentioned it in a note to clients shared with MarketWatch on Monday.
Although the Fed tightened policy at the fastest clip since perhaps the 1980s over the past year, rapidly accelerating inflation drove the equilibrium level of interest rates in the U.S. economy higher even more quickly, the economists said. Because of this, policy didn’t enter restrictive territory until the first quarter of 2023.
Inflation slowed to a 12-month rate of 3.8% in May, according to the latest reading on the PCE index, released Friday. That marked the slowest pace since April 2021. That is a sharp turnaround from one year ago, when inflation accelerated to its fastest pace in more than 40 years.