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Federal Reserve officials forecast higher interest rates through 2026 this week, a sign that borrowing costs are not heading back to the rock-bottom levels normal before the pandemic.
By Ben Casselman and Jeanna Smialek
The era of ultralow interest rates may be over. At the very least, policymakers don’t expect the type of low borrowing costs that prevailed before the pandemic to return anytime soon.
The Federal Reserve decided this week to leave interest rates unchanged at their highest level in two decades, and left the door open to raising rates again before the end of the year. But an even more significant if subtle change lurked in its freshly released economic projections.
Fed officials do not expect rates to go much higher — the next quarter-point increase is likely to be the last, if they make even that. But they do expect borrowing costs to stay elevated for years to come. Policymakers expect their benchmark short-term interest rate to stay above 5 percent next year, and to end 2025 at nearly 4 percent, the estimates showed. That would be roughly double where they were at the end of 2019.
Even in 2026 — when, the Fed hopes, inflation will have been fully stamped out and economic growth will have settled back into its longer-run trend — policymakers expect rates to remain well above the levels that prevailed before the pandemic.
In other words, higher rates may be here to stay for years.
That conclusion stems in part from a simple observation: The Fed has raised interest rates aggressively over the past year and a half, yet the economy has barely blinked. That suggests that after years in which even the slightest increase in rates threatened to bring growth to a halt, the economy might at last be able to withstand higher borrowing costs.
“They are surprised at how strong the economy has been this year despite the large amount of tightening the Fed has done,” said Gabriel Chodorow-Reich, a professor of economics at Harvard, referring to Fed officials. The staying power suggests that rates may need to be higher to weigh on growth, and that “Fed policy hasn’t been quite as tight as we thought it was.”
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