Daily Spotlight

Fed Moves to the Sideline

The Fed met last week, did not raise rates, and indicated it was not planning to raise rates again this year. Next year? Maybe one increase. So the count in the current rate-hike cycle, which began in December 2015, stands at nine. The federal funds target rate remains 2.25%-2.50%. The Fed also indicated it would slow down the pace of its balance-sheet normalization and conclude the program in September. Back in December, after raising rates for the fifth quarter in a row, the central bank's "dot plot" of member surveys called for two 25-basis point increments in 2019, and one more in 2020, before a potential rate cut in 2021. We were skeptical the Fed would need to hike rates three more times, given slowdowns in housing, a hiccup in employment and potential disruption from tariffs. Meanwhile, inflation has remained on tame, as oil prices have declined. The Fed seems to agree and is signaling slower growth. Investors have responded by piling in to longer-term Treasuries, and the Treasury yield curve is essentially flat. A flat yield curve, of course, signals a slowing economy, and our forecast for U.S. economic growth continues to point to slower growth ahead after the 2Q GDP peak rate of 4.2%. We think long-term rates reflect the weak economic outlook, in addition to global uncertainty over Brexit. Once Brexit is resolved, we look for long-term rates to drift higher and for the yield curve to steepen somewhat. ...  given slowdowns in housing, a hiccup in employment and potential disruption from tariffs. Meanwhile, inflation has remained on tame, as oil prices have declined. The Fed seems to agree and is signaling slower growth. Investors have responded by piling in to longer-term Treasuries, and the Treasury yield curve is essentially flat. A flat yield curve, of course, signals a slowing economy, and our forecast for U.S. economic growth continues to point to slower growth ahead after the 2Q GDP peak rate of 4.2%. We think long-term rates reflect the weak economic outlook, in addition to global uncertainty over Brexit. Once Brexit is resolved, we look for long-term rates to drift higher and for the yield curve to steepen somewhat.    more

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