The term “higher for longer” has become a frequent phrase surrounding the Federal Reserve’s recent policy. It implies that even after the current cycle of raising interest rates concludes, the rates will likely stay above what the Fed believes would support sustained economic growth at 2% inflation.

Investors have been keen to understand the Federal Reserve’s future policy directions, particularly what “longer” means in this context. The Fed’s latest meeting provided some answers, revealing that the institution sees at least three more years of elevated rates. On Wednesday, the Fed decided to maintain the current interest rate in the 5.25%-5.5% range, a peak not seen in 22 years.

Along with this decision, the Federal Reserve released new economic forecasts for interest rates, unemployment, growth, and inflation. According to the “dot plot,” a chart representing Fed officials’ expectations for future rates, most officials anticipate at least one more rate hike this year.

Future Years Provide More Clues

Updates for 2024, 2025, and an initial outlook for 2026 offered additional insights. Since the Fed last updated these forecasts in June, the central bank has removed 0.50% worth of planned rate cuts for both 2024 and 2025. Rates for 2026 are expected to be higher than the long-term rate projections.

However, during his press conference on Wednesday, Fed Chair Jerome Powell was quick to underline that these are merely projections. “It’s a culmination of individual forecasts from 19 people, and then what you’re seeing are the medians,” Powell noted. “So I wouldn’t want to bestow upon [the dot plot] the idea that it’s really a plan.”

Economic Implications

Though not strictly a roadmap, the dot plot and other economic forecasts do hint at the Federal Reserve’s expectations for the U.S. economy. The Fed seems to foresee a need for even higher real interest rates—interest rates minus inflation—to slow down a faster-than-anticipated economic growth. “It’s a real rate that will matter and that needs to be sufficiently restrictive,” Powell stated.

Powell acknowledged that these terms and projections might sound vague. “I would say you know it’s sufficiently restrictive only when you see it,” he said. “It’s not something you can arrive at with confidence in a model or in various estimates.”

The Federal Reserve’s recent meeting and projections have provided some direction, but like many things in life and in central banking, the future remains uncertain.

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