The Fed officially announced that it was pulling forward the end date for tapering this week (from June to March), which effectively translates into an acceleration in the lift-off date for short-term interest rates. Thus, it was no surprise that the Fed’s dot plot also signalled a shift in rate guidance, with the committee now anticipating three rate increases in 2022, whereas previously none were expected until 2023. The key question is not so much when rates will increase, rather it is how high they will eventually have to rise.

In this Economics Weekly we tackle the terminal rate debate, with the view that for policy to become restrictive, real rates have historically had to rise above the real neutral rate of interest—a rate that is well above today’s market rate expectations.

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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.