Fed’s (mis)projections may reinforce the bleak outlook for income
Recent Fed (over)projections may reinforce a bleak outlook for traditional income in 2020. Our chart of the week illustrates the mismatch.
December 20, 2019 | 1 minute read
The Fed cut its target funds rate three times this year, lowering it to 1.5%–1.75%, and investors currently anticipate one more rate cut in 2020.
Yet comments this week by a chorus of Fed officials – Chair Powell and Presidents of the New York, Boston, Dallas and St. Louis Fed among them – appeared to belie investors’ expectations. Each Fed President signaled that monetary policy is currently in a good place and will likely remain where it is for the foreseeable future.
Looking further ahead, the Fed’s Summary of Economic Projections forecast the median Fed funds rate to remain steady in 2020 before rising to 1.9% in 2021 and to 2.5% over the longer run.
Despite their forecasts for a gradual increase, it is worth noting that Fed officials over the years have regularly believed interest rates would be higher than they actually were. As the chart highlights, officials originally projected the Fed funds rate at the end of 2019 would be a full 1% higher than it currently is.1 They have made similar overprojections in four of the past five years.1
On average, economists expect U.S. economic growth to decline slightly from its 2018 pace but generally maintain a slow-but-steady pace of growth. Such a scenario suggests that the era of low inflation and low interest rates is unlikely to come to an end any time soon.2