Federal Reserve Bank of New York

Fed Forecast: What to Expect Next For Interest Rates

June 24, 2019
Mike MorelandBy Mike Moreland
Vice President Investments

Markets cheered last week, following the dovish tone of the Federal Reserve’s Open Market Committee statement and Chairman Powell’s following press comments.

The particularly encouraging news for “bond bulls” came from the Summary of Economic Projections (a.k.a the “dot plot”), which showed that fully half of participants expect a lower-rate environment by year's end.

FOMC participant assessments of appropriate monetary policy

Fed Dot Chart

(Midpoint of target range or target level for the federal funds rate)

When (and How Much) Will the Fed Cut Interest Rates in 2019?

Market expectations are consistent with, and maybe even a little ahead of, the official view. Futures markets currently project two or three cuts to the federal funds rate (the rate at which banks lend overnight reserves to one another) by year's end. A July cut of one-half percent is becoming consensus. This is seen as a “preemptive strike,” a recognition that failure to cut could substantially hurt economic conditions.

While the Fed may take early action, we would be surprised to see a large cut as soon as July. First, as my colleague Krista Eberly pointed out a few weeks ago, the U.S. economy is not in bad shape — in fact, quite the opposite. While recent growth is slower than the first quarter, it is still nicely positive. It is unlikely the Fed will take dramatic steps without sustained deterioration in economic activity.

A second reason for caution is that the Fed has substantially less room to maneuver today than in the past. While high in comparison to most developed economies, the absolute level of interest rates in the U.S. remains near historic lows.  And, the Fed’s own balance sheet remains elevated from years of “quantitative easing” — the purchase of Treasury debt for its own account. The options available to the Fed are much less expansive than they were a decade ago during the credit crisis.

With all of this in mind, we wouldn’t be surprised to see a small accommodation move as early as July. But anything larger runs the risk of further reducing the Fed’s flexibility down the road, as well as stoking the fires of market speculation in both bonds and stocks. No action, on the other hand, would be a clear disappointment to market participants, likely creating a sharp reversal of recent gains.

As such, as always, caution is warranted. At Security National Wealth Management, we do not build portfolios based on near term expectations, but we do build them to help reduce volatility in uncertain times. Diversification and attention to valuation and credit quality are paramount in our process. Ask your advisor to see how these work for you.

About the Author

Michael Moreland

Mike Moreland is Vice President of Investment Services at Security National Bank. With more than 40 years of Wealth Management experience at SNB, and his Sioux City roots, Mike has a rich background in finance and Siouxland.