Josh: Our view is that, over the next few years, the Fed will ultimately need to raise rates to a level that restricts the economy sufficiently to contain inflation—by our estimates likely around 3%. That is roughly 100 basis points higher than where the market has been pricing.1
Our view considers our estimate of the neutral rate and inflation around the Fed’s target level.2
The delicate position for the Fed is to tighten policy enough to moderate inflation pressures without doing so too aggressively and ending the business cycle prematurely. But being too easy at this point likely invites a greater risk. If the Fed were to lose control of inflation or inflation expectations, there’s a range of potential outcomes that could have negative effects on the real economy, the value of assets, and people’s standards of living. We expect these considerations to be part of Fed policy debates.