ING mener, at den amerikanske rente vil forblive lav i en længere periode, end der hidtil har været forventninger om. ING bygger opfattelsen på den seneste udmelding fra den amerikanske centralbank om inflationen.
Federal Reserve Preview: Lower for even longer
The new normal – “averaging” 2%
Under the Fed’s old regime the policy was to pre-emptively raise interest rates before inflation got to 2%.
Numerous inflation downside misses over the years has since led to a change of thinking. The conclusions of last month’s Federal Reserve strategy review showed that under their assessment of the “new normal” for the US economy both the long run trend rate of US economic growth and the estimates for neutral interest rates is lower than previously thought.
The conclusion is that the Fed is now acknowledging they ran policy too tight in recent years.
What does it mean for Fed policy?
While there is unlikely to be any policy change this meeting given the decent activity and employment backdrop and the recent rise in inflation, we are assuming there will be a change of language within the statement given the Fed’s shift in thinking.
The interesting thing will be what they have to say about 2023 as they extend out their forecast range by another year. We tentatively suggest there is a consensus behind one rate hike before the beginning of 2024, but this is not a strong conviction call. We also wouldn’t be surprised to see the long run expectation for the Fed funds rate revised lower given the new thinking within the Federal Reserve.
Low for a very long time
Either way, Jerome Powell will use the press conference to reinforce the message that the Fed has no interest in raising interest rates anytime in the next couple of years, which should help to anchor the short-end of the yield curve even more sturdily.
We also see little meaningful upside pressure on the long end of the curve coming from this week’s meeting. There had been some recent upward pressure on longer dated treasuries given anxiety about what that the Fed’s renewed focus on delivering higher inflation would mean for fixed coupon payments over many years. Nonetheless, saying they want higher inflation and delivering it are very different things.
With the US economy continuing to face numerous challenges and the slack in the labour market meaning little prospect of wage inflation, the chances of the Fed meaningfully improving on its hit rate for 2% inflation anytime soon don’t look great.
The Fed will leave the door open to further potential action
In any case, Powell will leave the door open to further potential action, most likely involving additional QE, but will once again emphasise that the Fed can’t generate demand. For that we will need to see additional fiscal stimulus, but that is looking only a remote possibility ahead of the November 3rd elections.
