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real rates move into the 2%-to-4% range before the economy ultimately rolled over. That’s certainly not to say that we need to see another 200 bps of tightening, but real rates might need to drift up somewhat further through a combination of more disinflation, and incrementally more tightening.

Key Takeaway

Monetary policy tightening takes time to work, and it is working… gradually. Keep in mind that this tightening cycle started from an exceptionally stimulative level, and the economy may have some extra buffers built in. That said, real policy rates have now crept into positive territory, which is a critical checkpoint, but it’s entirely possible that policy just hasn’t become quite tight enough, for long enough, yet. We saw the Bank of Canada give a nod in this direction when it raised rates again in June and July; and we suspect both the BoC and Fed will have to hold these restrictive rates into 2024. For the economy, this is still a lot of tightening to swallow, and the risk of a downturn remains in place—for around the turn of the year. n

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