The Fed confused a lot of people on Wednesday with a projection that rates will go DOWN as much as a full point next year even if inflation remains above the central bank’s 2% pain point. Jay Powell explained it.

Real interest rates are not coming down until the Fed declares victory on inflation. But as price pressure weakens, nominal rates need to go down . . . if they don’t, it will feel like conditions are getting even tighter even if the Fed does nothing.

And we know exactly where Powell and company want real rates to be. The projections aren’t exactly subtle. Take the core PCE inflation rate and add 1.7 percentage points. That’s where the nominal overnight lending rate will go.

Right now, the Fed sees core PCE staying above 3.9% for the remainder of this year. If so, that’s going to drive them to vote for another two “small” quarter-point hikes.

But they could be wrong. They’ve been wrong before, usually when it comes to underestimating inflationary pressure in the economy. However, with another inflation gauge dropping to 4% last month, they’re clearly doing the math and concluding that the PCE might fall below 3.7% this summer . . . and a tightening move here would be dangerous.

This tells us that the Fed already thinks real rates are close to a reasonable maximum. Anything more would cause real economic pain.

Naturally, inflation could drop harder than they currently project, in which case nominal rates will actually go down. But inflation needs to make the first move. If it doesn’t, the Fed can’t afford any gesture of mercy.

And that means that anyone betting on an outright rate cut in the next few months is probably just throwing money into a wishing well. It’s unlikely. Powell says nobody at the Fed is even considering reducing real rates this year unless the economy suddenly crashes.

Nobody wants to wish for that. Trust me, if things get that bad, inflation will vanish anyway, which gives the Fed all the leeway they need.