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The Federal Reserve could raise its benchmark interest rate as high as 5.5% by the end of next year in its effort to bring inflation down, said Jason Furman, a Harvard economics professor and former Chair of the Council of Economic Advisers under President Barack Obama.
It is entirely “plausible” that the Fed raises its benchmark rate to 4% this year and then do a string of quarter-percentage point rate hikes over 2023 to get up to 5.5%, Furman said, in an interview with MarketWatch on the sidelines of the Fed’s summer retreat in Jackson Hole.
The Fed’s benchmark rate is now in a range of 2.25%-2.5%. The central bank’s own projects have them stopping rate hikes just under 4%.
Read: Powell says bringing down inflation will cause pain for households and businesses
Furman said the Fed needs to push its benchmark rate above 5% to get inflation down to less than a 4% annual rate, he said. Consumer price inflation was running at an 8.5% annual rate in July.
Inflation has morphed from a straightforward matter of too much demand and too little supply to become more about rising wages and prices, he said.
Furman says he likes to call it wage and price “persistence” rather than a wage price “spiral” because inflation is not spinning out of control, but is holding its own and has a lot of staying power.
It is likely that inflation “comes down very slowly,” he added.
Furman said that the inflation outlook is not “dire or insurmountable.”
Unlike the 1970s and early 1980s, wages are not indexed to inflation and the public has not come to expect high inflation.
The Fed also benefits from support from President Joe Biden, Furman said.
“The list of presidents who have the supported the Fed when they were hiking rates is not long,” Furman said.
The odds of a recession in the next nine months are relatively small, Furman said.
