Fed Watchers Put 'Finger in the Air' and See Rate Peak Above 5%

Federal Reserve Chair Jerome Powell’s declaration that peak interest rates will need to go higher than previously thought has Wall Street making its best guess on that final level.

The Federal Open Market Committee in September estimated reaching a target range of 4.5% to 4.75% in 2023. But Powell, citing high inflation and a very tight labor market, told reporters Wednesday that “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

He spoke after officials raised rates by 75 basis points for the fourth straight time to a 3.75% to 4% range, extending the central bank’s most aggressive tightening campaign since the 1980s.

Four Fed policymakers who spoke since the meeting similarly flagged a higher rate without giving a precise forecast. Richmond Fed President Thomas Barkin said Friday on CNBC that it’s “entirely conceivable” the central bank may need to raise rates above 5%, though that isn’t the current plan.

With little to go on beyond Powell’s remarks and the Fed’s statement on Wednesday, Nomura Holdings Inc. economists after the meeting raised their estimate of where rates will peak to a range of 5.5% to 5.75%. Others reaffirmed projections that were for 5% or higher next year.