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How does the current pace of Fed rate hikes compare with past tightening cycles?

After falling behind the curve, the Fed’s recent tightening path has easily outpaced anything in recent decades as it attempts to catch up with inflation.

Fastest tightening pace since 1980s chartAs expected, the Fed announced another policy rate hike of 75 basis points (0.75%) yesterday, bringing the Fed funds rate to a range of 3.75–4.0%, and a cumulative increase of 3.75% year to date. Additional tightening is still expected, with a potential 50 basis points still anticipated before the end of the year and some degree of additional hikes in early 2023. How does this rate hike cycle compare to recent Fed tightening episodes?

As illustrated above, this one has been unusually steep and rapid compared to any since the 1980s. Of the five prior hiking cycles since 1986, the closest was in 1994 when the Fed raised its policy rate by about 1.75% in nine months — less than half of the cumulative increase during a comparable period this year.

Why has the Fed been so aggressive this time around? Persistently high inflation that has easily outpaced any expectations played a role, as did the notion that policymakers were too slow to react to those building pressures. That ultimately forced the Fed to play catch up, pushing the central bank’s policy rate sharply higher while also draining liquidity from the economy by trimming its balance sheet (quantitative tightening).

The message from policymakers remains largely unchanged, reiterating a commitment to bringing inflation back to the Fed’s 2% inflation target via whatever means necessary. Based on Fed Chair Jerome Powell’s comments yesterday, it still appears unlikely that they will back away from that commitment until meaningful progress has been made toward that goal. There’s still a long way to go, but there are already signs emerging that a combination of factors is contributing to inflation pressures starting to recede.

How long will it take for the Fed to accomplish its goal? That remains to be seen.

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