Expect Fed Rates to Exceed 5% in 2023

A few days into 2023 and it’s time for some bad economic expectations beyond what most have projected.

Bankrate’s 2022 Q4 survey of economists has come in with a consensus expectation that the Federal Reserve’s Federal Open Market Committee will take its benchmark interest rates up to between 5.25% and 5.5%. The average number that the experts offered was 5.35%, well up over the 4.71% average in the third quarter’s survey and the highest since 2001. The economists came in with peak rate expectations ranging from 4.75% to as high as 6.25%.

Most Fed officials, by the way, have said they expect rates to top out at between 5% and 5.25%. The lowest forecast from the Fed was 4.9%, while the highest was 5.6%. Previously, Federal Reserve Bank of St. Louis president Jim Bullard had made a case of at least 5% and potentially as high as 7%. Perhaps his views have changed. But then, as Bankrate noted, a year ago the Fed thought that inflation in 2022 would peak at 2.6%

As Oxford Economics noted on the newly released minutes from the Fed’s December meeting, “The Fed is going to return inflation to their 2% objective and if they can accomplish that without a recession remains up for debate. The minutes clearly highlight the Fed’s focus on inflation but also their displeasure with the loosening in financial market conditions, which they believed hindered their efforts to achieve price stability. Reading the tea leaves, the minutes stress that the Fed is going to reduce inflation at the risk of hurting the labor market and the broader economy.”

Currently, the target federal funds rate range is 4.25% to 4.5%. There’s a long way to go. And some time, as well, if the bulk of the economists polled are correct, as 62% don’t expect the Fed to cut rates until 2024. They also expect the 10-year Treasury yield to reach 3.99% a year from now.

That last bit is significant and can get lost in discussions about interest rates and CRE financing costs. While commercial rates do correlate to the federal funds rate to some degree, one of the big issues Fed monetary policy has caused is quantitative tightening. The institution bought bonds tied to residential mortgages, not commercial. So commercial rates have a stronger relation to the 10-year Treasury. That’s a jump from where they currently sit, meaning that high financing costs are likely to rise even more.