Chart of the week

Projections of long-run Fed funds rate are declining

Get our review of market reactions to the Fed’s 25 bps rate cut this week and the likely upshot of the Fed’s downtrending rate forecast.

August 2, 2019 | 1 minute read
  • This week, the Fed cut its benchmark interest rate by 25 bps to 2.0%–2.25% as expected. The FOMC statement cited rising economic activity and solid job gains, but noted that the decision was made “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”1
  • In his post-decision press conference, Fed Chair Powell framed the rate cut as a “mid-cycle adjustment.” While noting that officials hadn’t ruled out additional cuts in the future, Powell also failed to explicitly tee-up an additional rate reduction at the September FOMC meeting.
  • This perceived hawkishness disappointed markets, kicking off a decline in U.S. equity prices as investors weighed the potential of ongoing uncertainty and additional Fed pivots in the months ahead.
  • Perhaps more tellingly, bond investors appeared to be unconvinced that rate cuts will help to stem weaker global growth and persistently low inflation. Notably, U.S. government bonds flattened across the curve, with the 10-year U.S. Treasury yield slipping back below 2.0% and the 2-year/10-year Treasury spread declining to approximately 15 bps.2
  • More broadly, however, this week’s action by the Fed potentially sets the stage for further rate cuts ahead. The Fed’s own projections of long-run interest rates have been trending down since it first started publishing its forecast in 2012, suggesting the era of low inflation and low interest rates is unlikely to come to an end anytime soon.

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