Could the Fed Raise Interest Rates Above 5%?

The Federal Reserve has been on an unprecedented path since the 1980s. On November 2, 2022, it looks poised to make its fourth consecutive interest rate hike of 75 basis points to take interest rates to around 4%.  

The Fed’s hawkishness could eventually take the rate above 5% at some point in 2023. But, just how likely is it?  

Aggressive Fed vs. Red Hot Inflation 

The Federal Reserve has been increasing the cost to borrow money since March 2022. From a target Funds Rate of 0.25%, an initial 25 basis points hike brought it to 0.5%. 

In May, the US central bank got tougher with a 50bp increase. Three subsequent 75bp hikes since have increased the Funds Rate to levels not seen since the 2008 financial crisis. What sets these rate increases apart, however, is their speed. The Federal Reserve has not been this aggressive in its monetary policy since the 1980s.  

Federal Reserve Funds Rate. Source:

 The tightening is a response to the worsening Consumer Price Index picture and red-hot inflation statistics. As per figures from the US Bureau of Labor Statistics, the yearly CPI of all items in its basket of common household goods is now a massive 8.2%. Typically, the Fed targets around a 2% increase year-on-year.    

Undoubtedly, the dreary economic outlook traces its roots to the unprecedented fiscal response to the COVID-19 pandemic. Already reeling from almost two years of sporadic and disruptive measures — not to mention many new dollars entering the money supply — a conflict in Ukraine and subsequent international sanctions on one of the planet’s largest energy producers have only bleakened the picture.  

What Are the Markets Saying? 

Until inflation starts falling, many observers believe the Fed will continue tightening into next year, eventually hitting a 5% or more target at some point. FedWatch is a useful tool to track changing market sentiment.  

At the time of writing — October 2022 — the site estimates a probability of a 50 to 75bp hike at the Nov. 2 Fed meeting is greater than 89%. Meanwhile, for the March 31 meeting, there is a 29% probability of a 5 to 5.5% Funds Rate, and a staggering 71.2% chance of over 4.75%.   

FedWatch gives a 71% probability of a greater than 4.75% Funds Rate by March 2023. Source: FedWatch

Similarly, prices in the 30-Day Fed Funds market show that traders are not optimistic about a Fed pivot any time soon. The contracts show the market is expecting rate hikes to continue well into 2023. 

Such tightening will certainly not be music to the ears of traders on platforms like easyMarkets. However, any signs of dovishness from the Fed during the end of 2022 and 2023 will likely see stock prices rally hard, however briefly.  

Most financial experts generally agree with the FedWatch probabilities and futures market expectations, too. Larry Summers, the former US Treasury secretary, said he expects interest rates to peak just above 5%. Less optimistic still, Wells Fargo’s Mike Schumacher believes rats could stay that high for a year.