Dear Garden State Trust:
How much higher do think interest rates will go? Inflation has already damaged my household budget this year, and higher interest rates on my debts will just make it worse. Isn’t there a chance these interest rate increases could trigger a recession or worse?
—Wounded Already
Dear Wounded:
Interest rates will keep going higher until inflation is brought under control, according to Fed Chairman Jerome Powell. No one knows with any certainty just how long that will take. After its September meeting, the Fed signaled that it expected short-term rates to rise above 4% by the end of this year, continuing to rise in 2023, then falling back below 3% in 2024.
You are correct that higher interest rates, which are intended to slow the economy to a “soft landing,” could overshoot the target and trigger a recession. In fact, CNN reported on a KPMG survey of 400 leaders of large companies that found 91% of them expect a recession in the next 12 months. Similarly, the Fed Chairman has also warned that general economic pain will not deter him in his quest to conquer inflation.
The financial squeeze on households is a very real problem already, your dilemma is far from unique. An October report from the Federal Reserve Bank of Dallas noted that for more than half of American workers wage gains have been outpaced by inflation. The real, inflation-adjusted value of median wages has fallen by about 8.5%. The report concluded: “While the past 25 years have witnessed episodes that show either a greater incidence or larger magnitude of real wage declines, the current time period is unparalleled in terms of the challenge employed workers face.”
Do you have a question concerning wealth management or trusts? Send your inquiry to contact@gstrustco.com
(October 2022)
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