What is the Terminal Federal Reserve Funds Rate?
Posted on 06/12/2023
U.S. economists refer to the terminal rate as the neutral interest rate where prices are stable and full employment is achieved. This is also known as the equilibrium rate. The terminal federal funds rate is the final interest rate that the Federal Reserve sets as its target rate for overnight interbank lending. The terminal rate is the long-term target, while the current rate is the short-term rate.
In September 2022, officials at the Federal Reserve projected a terminal rate of 4.6% in 2023.
Federal Reserve Chairman Jerome Powell made comments in numerous venues in 2023 that Fed rate hikes should not be stopped prematurely until inflation is under control.
Some money managers as of May 2023 see the Fed’s terminal rate in a range of 5.25% to 5.5%, just a quarter of a percentage point higher than the current rate target. The current fed funds rate is a target range of 5% to 5.25%, the highest since August 2007.
Keywords: Federal Reserve System.