FOMC Members Are Starting to Agree More, and They Expect Higher Long-run Interest Rates

Tucked away into recent updates to the FOMC’s Summary of Economic Projections is a subtle shift in where and when policymakers expect long-term interest rates to land.

Since the Federal Reserve began rate hikes in March, average interest rate forecasts, as informed by the FOMC’s "dot plot," have climbed in both magnitude and consensus. The committee’s average projection for the “terminal rate” of interest, the rate at which inflation normalizes, and the committee stops their increases— has climbed from an average forecast of 2.38% at the March 2022 Fed meeting to an average forecast of 5.13% as of the December 2022 meeting.

The shift reflects policymakers’ growing hawkishness and harmony as inflation has proved more difficult to get under control. Understandably, as consumption continued to flourish through the summer and fall, while price pressures held despite tighter credit markets, policymakers took a more aggressive posture to rebalance the scales.

Members are also starting to agree more. At the March meeting, just 25% of FOMC members surveyed held a consensus view on where rate hikes could terminate. Consensus grew to 33% by June and stands at 51% as of December. In an interesting twist, it appears that as the battle against inflation intensified, members became more clear-eyed on the challenge that they faced —and the tools needed to fight it.

In another shift, the committee’s forecast for the longer-run federal funds rate has also ticked up over the last few projections.

In March, the average forecast for longer-term interest rates was 2.25%, albeit the consensus forecast was cast by six members, while a separate five projected a longer-term rate of 2.5% at that time. As of the December projections, the average forecast for longer-term rates sits firmly at 2.5%, supported by nine committee members, with the second-closest member total coming in at just four who forecast a 2.25% long-run rate.

While the committee appeared to react to recent evidence of easing US inflation by reducing their rate increase from 75 to 50 basis points in December, their outlook has grown increasingly hawkish at the same time. The reduced rate hike should help dampen fears from doves who are worried that The Fed is ignoring disinflationary signals. However, in a commitment to hold rates higher for longer if needed, the commitee has signaled that it is willing to stay in the fight for as long as it takes.