The Fed is almost done hiking and what they do this week (probably a 75 BPS hike), and in December (probably a 50 BPS hike), is almost irrelevant over the long-term. The larger question is how long will the Fed hold rates at an elevated level?
We likely won’t see a zero percent Fed Funds Rate rate for the remainder of this decade.
The Fed may hold its policy rate at 3-4% for the remainder of the decade as I don’t believe CPI will return to 2% or below for the next few years if at all this decade.
More importantly, I believe the Fed should hold the monetary base flat as we work through this economic recession and to expand it should the recession turn into a depression. The Fed ought to refrain from shrinking the monetary base further as the economy softens. Steady state, modest 1-3% growth in the monetary base over the long-term would be sensible.
The Fed will face enormous political pressure over the years to fund various fiscal spending programs which are the very reason why we have the current inflation mess. It will take someone of very strong character in the Fed Chair position to resist monetizing fiscal spending plans that will undoubtedly be spawned from Congress and the Executive Branch.
The “Inflation Reduction Act” and paying for college tuition are the two most recent brilliant ideas to come out of the Biden Administration, each of which will require the Fed to subsidize 100% of the spending which means further dilution of the U.S. Dollar.
Under Trump and Biden the Dollar has never been so diluted, just look at the monetary base over the years (chart below).