Chart of the week: Is this a major turning point for US interest rates or just trimming the sails?

June 25, 2019

Bob Cunneen, Senior Economist and Portfolio Specialist

Sources: Federal Reserve, CME Group.

After three years of raising US interest rates, the Federal Reserve (Fed) is now signalling a change in direction. The Fed’s commentary indicates that “uncertainties” over global growth and trade tensions as well as “muted inflation pressures” could warrant lower US interest rates.

Financial markets are adamant that much lower US interest rates are required. US interest rates futures are priced to be 0.75% lower by the end of this year (red line). Notably both US government and corporate bond yields have fallen sharply in recent weeks while the US share market is again approaching record highs on these expectations for much lower US interest rates.

However financial markets may be running on exaggerated expectations of the Fed’s willingness to cut US interest rates. The Fed still considers that US economic growth is running at a “moderate pace” and that the “labour market remains strong” even with global concerns. Indeed the Fed’s projection indicates only a modest 0.25% cut in interest rates in 2019 is the most likely path (blue line). So the turning point for US interest rates currently priced by markets may prove to be only a modest ‘trimming of the sails’ by the Fed.

 Source : Nab assetmanagement June 2019 

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