Interest Rate Forecast

Economic Forecasts

Fed Cuts Rates; Yield Curve Back to “Normal”

Kiplinger’s latest forecast on interest rates

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GDP 2019 growth will be 2.3%; 1.8% in 2020 More »
Jobs Job gains of about 170,000 per month in ’19 More »
Interest rates 10-year T-notes staying around 2% until trade war ends More »
Inflation 2.1% in ’19, up from 1.9% in ’18 More »
Business spending Up just 2% in ’19 amid uncertainty of trade war More »
Energy Crude trading from $50 to $55 per barrel in December More »
Housing 3.5% price growth by year-end ’19 More »
Retail sales Growing 4.3% in ’19 (excluding gas and autos) More »
Trade deficit Widening 7% in ’19 More »

The Federal Reserve cut its short-term rate for a third time, but indicated that it may hold off on further cuts for a little while. The Fed again lowered the federal funds rate by a quarter-point, to a range of 1.5% to 1.75%, However, in his press conference on Oct. 30, Fed Chair Powell again emphasized that the future path of Fed actions will depend on whether risks posed by the trade war and the global economic slowdown subside or strengthen.

The rate cut also caused the yield curve – the gap between rates on short- and long-term bonds – to revert to its historically normal upward sloping line for the first time in five months. This indicates that investors are much less worried about a possible recession occurring next year.

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We think the Fed will cut rates at least once early next year, but will mostly adopt a “wait-and-see” attitude beyond that. Of course, the FOMC members will publicly expect the economy to gradually improve, and rates to therefore gradually rise. But they are keen to stay ahead of possible negative developments, and the full impact of the trade war on the manufacturing sector has yet to be seen. Tariffs could go higher, too. Thus, the Fed will not hesitate to cut interest rates next year if FOMC members’ expectations of economic improvement do not come true.

The bank prime lending rate declined to 4.75% after the October cut. The decline in rates this year has aided the housing market – by making mortgages easier to afford – and perhaps consumers, but it will not boost business borrowing much because of all the economic uncertainty.

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While the trade war lasts, the yield on the 10-year Treasury note rates is likely to stay below 2%. Mortgage rates should stay around 3.7% for 30-year fixed loans and 3.2% for 15-year loans.

Source: Federal Reserve Open Market Committee

See Also: America’s Yield Curve Panic Is Overdone