Chart of the week

Federal Reserve’s longer-run GDP forecast remains below 2%

FOMC’s latest projections for the target federal funds rate and real GDP

March 23, 2018 | 2 minute read
  • The Federal Reserve delivered what many viewed as a dovish rate hike this week, raising the target federal funds rate by 25 bps to a range of 1.50%–1.75%.1 Policymakers noted in the Fed’s accompanying press release that the “economic outlook has strengthened in recent months.”1
  • In the Fed’s Summary of Economic Projections, policymakers bumped up their forecasts for both real GDP growth and the target federal funds rate in the coming years. Yet, they surprised some investors by maintaining their median estimate of three rate hikes in 2018, rather than adjusting their projections to four as many market participants had expected.2
  • Looking forward, the FOMC now forecasts three rate hikes again in 2019, up from two, and two hikes in 2020, up from one.2
  • Perhaps the most notable element of the Fed’s projections, however, came in its longer-run projections, which showed little to no movement. For example, the Committee still expects longer-run GDP growth to remain at just 1.8%, unchanged from its December projection.2 Policymakers edged up their estimate for the target federal funds rate to 2.9%, from 2.8% in December, yet the rate remains far below its average of approximately 5.5% during the last three economic expansions.2,3
  • While recent fiscal stimulus measures may result in improvements to economic growth in the coming years, policymakers expect GDP growth to decline to less than 2% as the effects of the measures wear off.2
  • In the meantime, rates on both the short and long ends of the Treasury curve are still at extraordinarily low levels historically. With economic growth expected to remain sluggish, we believe investors may continue to struggle to find income in the years ahead.

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