Interest Rate Forecast

Economic Forecasts

Yield Curve Inversion Won’t Cause Recession

Kiplinger’s latest forecast on interest rates

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The yield curve briefly inverted in March, when the 10-year rate fell below rates on Treasuries with maturity dates of a year or less. That caused alarm because inversions have preceded recessions in the past. Changed circumstances make an imminent recession unlikely, but low long rates can still indicate investor pessimism. Long rates have bumped up a bit in April following some good economic reports, however.

The Federal Reserve won’t hike interest rates in 2019. Committee members are acknowledging that the global economic slowdown has created enough uncertainty that the Fed should stand pat.

The Fed is also limiting the ongoing reduction in its portfolio of Treasury bonds and mortgage-backed securities (MBS). Come September, it will stop reducing altogether. However, it will continue to replace MBS with Treasuries, to a degree. It will also buy long-dated Treasuries as well as short-dated ones, which is a bit of a surprise.

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Some investors are betting on a rate cut this year, but are likely to be disappointed. They think the slowing global economy will force the Fed to backtrack. However, Federal Reserve Chairman Jerome Powell emphasized at a March 20 news conference that many things are going right: wages are growing, consumer confidence has rebounded, and financial conditions are good. He said that economic fundamentals are strong.

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The Fed could cut rates in 2020 if the expected economic slowdown threatens to snowball. GDP growth is expected to slow from 2.5% this year to about 1.8% next year but could worsen if a U.S.-China trade deal doesn’t happen, or other negative economic events occur.

Long rates are likely to pick up a little as the U.S. economy improves later this year. We expect that 10-year Treasury notes will rise to around 2.8% from their current 2.5% level. The 30-year fixed-rate mortgage will likely reach 4.5%; and the 15-year fixed-rate mortgage 4%.

The Fed rate-pause will benefit consumer spending, as the bank prime rate that auto loans and home-equity loans are based on will stay at today’s 5.5%.

Source: Federal Reserve Open Market Committee

See Also: America’s Yield Curve Panic Is Overdone