After another Fed meeting and another historically high rate hike, it’s clear that the Fed is committed to fighting inflation, but how and when will the real economy see the effects? Chief Cross-Asset Strategist Andrew Sheets and Global Chief Economist Seth Carpenter discuss.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Andrew Sheets:] And on this special edition of the podcast, we'll be talking about the global economy and the challenges that central banks face. It's Friday, September 23rd at 2 p.m. in New York. Andrew Sheets: So, Seth, it's great to talk to you. It's great to talk to you face to face, in person, we're both sitting here in New York and we're sitting here on a week where there was an enormous amount of focus on the challenges that central banks are facing, particularly the Federal Reserve. So I think that's a good place to start. When you think about the predicament that the Federal Reserve is in, how would you describe it? Seth Carpenter: I think the Federal Reserve is in a such a challenging situation because they have inflation that they know, that everyone knows, is just simply too high. So they're trying to orchestrate what what is sometimes called a soft landing, that is slowing the economy enough so that the inflationary pressures go away, but not so much that the economy starts to contract and we lose millions of jobs. That's a tricky proposition. Andrew Sheets: So we had a Federal Reserve meeting this week where the Fed raised its target interest rate by 75 basis points, a relatively large move by the standards of the last 20 years. What did you take away from that meeting? And as you think about that from kind of a bigger picture perspective, what's the Fed trying to communicate? Seth Carpenter: So the Federal Reserve is clear, they are committed to tightening policy in order to get inflation under control, and the way they will do that is by slowing the economy. That said, every quarter they also provide their own projections for how the economy is likely to evolve over the next several years, and this set of projections go all the way out to 2025. So, a very long term view. And one thing I took away from that was they are willing to be patient with inflation coming down if they can manage to get it down without causing a recession. And what do I mean by patient? In their forecasts, it's still all the way out in 2025 that inflation is just a little bit above their 2% target. So they're not trying to get inflation down this year. They're not trying to get inflation down next year. They're not trying to get inflation down even over a two year period, it's quite a long, protracted process that they have in mind. Andrew Sheets: One question that's coming up a lot in our meetings with investors is, what's the lag between the Fed raising interest rates today and when that interest rate rise really hits the economy? Because, you are dealing with a somewhat unique situation that the American consumer, to an unusual extent, has most of their debt in a 30 year fixed rate mortgage or some sort of less interest rate sensitive vehicle relative to history. And so if a larger share of American debt is in these fixed rate mortgages, what the Fed does today might take longer to work its way through the economy. So how do you think about that and maybe how do you think the Fed thinks about that issue? Seth Carpenter: It's not going to be immediate. In round terms, if you take data for the past 35 years and come up with averages, you know, probably take something like two or three quarters for monetary policy to start to affect the real side of the economy. And then another two or three quarters after that for the slowing in the real side of the economy to start to affect inflation. So, quite a long period of time. Even more complicated