Snapshot - Economics
Fed turns more dovish and signals an end to rate hikes
The Federal Reserve signals no rate rises for 2019
21 March 2019
- The Fed suggests no rate rises in 2019 and one in 2020
- The dollar fell on the news, sliding 0.8% against a basket of currencies
- Schroders forecasts the next change will be a cut
The Federal Reserve (Fed) has lowered its projections for US growth and inflation and reduced its expectations for interest rates. The “dot plot” published after last night’s meeting shows no rate hikes this year and only one in 2020.
Tighter financial conditions
At his press conference, Fed chair Jerome Powell said growth was slowing by more than expected amid tighter financial conditions. Although interest rates did not change, the Fed announced that it would stabilise its balance sheet in October, some three months earlier than previously expected.
This would seem to complete the Fed’s move from hawks in December to doves in March. Certainly the data has been soft with current estimates for Q1 GDP growth from the Federal Reserve Bank of Atlanta running at just 0.4% annualised. The Federal Open Market Committee (FOMC) statement highlighted the slowdown in household spending and business fixed investment alongside slower payroll growth.
A re-appraisal of the neutral rate for interest rates?
However, the latest move suggests there has been a more fundamental shift in the committee’s thinking. There was a significant reduction in the median projection for the Fed funds rate from 2.9% to 2.4% this year and from 3.1% to 2.6% by the end of next year. The reduction is greater than the fall in growth and core inflation projections combined and suggests a reappraisal of the neutral rate for the economy.
External factors are probably playing a role here and chair Powell mentioned the slowdown in international trade and Brexit, but the most likely factor has been the behaviour of inflation. Headline inflation has declined as a result of lower oil prices and core inflation has stabilised near the 2% target. Despite the late stage of the cycle, inflation is not a threat to the FOMC’s objectives and market expectations remain low.
Schroders now expects no further rate rises this year
We still expect the US economy to rebound in the second quarter as much of the current slowdown reflects a temporary move in inventory and we expect GDP growth to be stronger than the Fed forecasts this year.
Nonetheless, inflation is undershooting and with growth likely to slow toward the end of the year the window of opportunity for another rate hike is narrowing. Consequently, we are taking out our June rate increase and now see no further rate rises from the Fed this year. The next move is now likely to be a cut in 2020 as activity cools.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.