The Federal Reserve's interest rate policy has a huge impact not merely on the U.S. economy itself, but also on the global market as a whole. Reuters reported that on August 23, Minneapolis Federal Reserve Bank President Neel Kashkari said his biggest fear is that “the U.S. central bank misreads the extent and persistence of price pressures and will need to deliver even more aggressive rate hikes to control inflation”.

Of the 19 Fed policymakers, Kashkari is the most hawkish of them all. He expects the Fed to raise its policy rate by another 2 percentage points by the end of 2023, which is currently at 2.25% to 2.5%.

"The big fear that I have in the back of my mind is, if we are wrong and markets are wrong and that this inflation is much more embedded at a much higher level than we appreciate or markets appreciate, then we are going to have to be more aggressive than I anticipate, probably for longer, to bring inflation back down," Kashkari said. The Fed is quite clear about the need to tighten monetary policy. If inflation falls to 4%, the Fed will have the ability to slow the pace of rate hikes to ensure it does not raise rates too much and send the economy into a downturn.

With the current high inflation, Kashkari said the Fed needed "to err on making sure we are getting inflation and only relax when we see compelling evidence that inflation is well on its way back down to 2%". According to the Reuters report, Kashkari stated that his biggest concern is that if the Fed is "misreading the underlying inflation dynamics, then it's going to take us a while probably to figure that out, and then we are going to have to be even more hawkish than I am envisioning right now".

Meanwhile, Bloomberg reported that on August 23, Goldman Sachs chief economist Jan Hatzius said in an interview with the news media that if the U.S. falls into a recession, the Fed will definitely cut interest rates. Otherwise, policymakers are unlikely to stray from their current hawkish path.

Hatzius told Bloomberg, “I think in a small-growth environment when the Fed is trying to squeeze inflation lower, I think they would be very resistant to rate cuts. So I think those cuts are probably somewhat excessive from a market pricing perspective". On the other hand, JPMorgan expects the Fed to raise rates by 75 basis points in September before pivoting to a more dovish approach.

To this end, Hatzius expects prices will remain elevated by this time in 2023. "I think it could be a couple years [before the Fed cuts rates]," he said. "I think while inflation will look a lot better a year from now, I think it will still be significantly above the target and ultimately they do want to get it back down to pretty close to 2%".

CNN reported that on August 22, the National Association of Business Economics (NABE) released a survey of economists that states the Fed “is unlikely to tame inflation without pushing the American economy into a recession”.

The survey was conducted by the NABE between August 1 to 9, with 198 of its members participating. The results show that if the U.S. has not fallen into a recession now, 72% of economists expect the next recession will be in the middle of next year. 19% of economists said the U.S. is already in recession; while 20% believe that there will be no recession in the U.S. before the second half of next year.

The NABE survey also shows that about 73% of economists said they had little or no confidence in the Fed’s goal of keeping inflation down to 2% over the next two years without causing a recession. Only 13 % of economists said they are confident or very confident the Fed will achieve this goal.

Based on the above information, it is necessary for the Fed to raise interest rates. Otherwise, the inflation in the U.S. and in the dollar-zone will not be restrained. The nominal price will rise and damage the basis of the value of assets.

What then, will the future hold?

My own judgment is that, the Fed will opt to continue maintaining a strong dollar monetary policy. That being said, depending on the current inflation situation, it will simultaneously greatly slow down the pace of interest rate hikes and give inflation time to gradually reduce. Therefore, for the Fed, the latest inflation performance, including key market price indexes, will be of utmost importance. Song long as it does not rise but fall, it will provide the Fed with the determination to slow down the pace of interest rate hikes.

If we compare the current 2.5% interest rate level with the 1.75% interest rate generally offered by banks before the outbreak of the COVID-19 pandemic, it is noticeable that the existing interest rate level is about one percentage point higher than the original "normal" interest rate level. This signifies that at the "normal" level, some interest rate pressure has been maintained, helping to cool down overheating economic performance. Even taking into account a large amount of money released during the hedging period of the pandemic, it would be sufficient to increase the interest rate by another 0.5% to bring it to the level of 3%. Therefore, the Fed's 3% interest rate is the major bottom. This is my current basic judgment about the Fed's future interest rate policy.

It should be noted that the most crucial factor in such interest rate forecasts is time. Just like the concerns of some major investment banks mentioned above, the real problem is that an overly fast and aggressive interest rate policy may cause great damage in the future. It will also be out of touch with the current geopolitical requirements, which will lead to disorder in the world market. Therefore, it is critical for the Fed to remain patient. This is also the key to testing the level of the Fed's interest rate policy during such a period of time.