The latest ‘dot plot’ of the level of US policy rates that each member of the central bank’s Federal Open Market Committee (FOMC) deems ‘appropriate’ at the end of 2024, 2025 and 2026 at first reading appears more hawkish than in March.
Indeed, the median point for the benchmark federal funds rate at the end of this year is now 5.125%. That corresponds to just one 25bp rate cut by the Fed in 2024 (the median point in the current 5.25-5.50% range is 5.375%). That is much less than the three cuts totalling 75bp that had been considered appropriate in December 2023 and March 2024.
The details of the individual projections show that four FOMC members are now contemplating a status quo until the end of the year, seven favour one cut and eight two cuts.
One week after the latest FOMC meeting, market-based expectations (OIS rates in the graph) are pointing to around 4.80% for the overnight rate at the end of the year – that implies two policy rate cuts. The futures market reflects 100bp in cuts in 2025.
As for the ‘appropriate’ longer-term federal funds rate (aka the equilibrium rate, the neutral rate, or r*), the level has changed from March’s 2.562% to 2.75% in June. Within the FOMC, four members think it could between 3.50% and 3.75%; five see it at or slightly above 3.0% and for 11 members, it stands at around 2.5%.
Before the pandemic, a large consensus was for a neutral rate at 2.5% for the US economy. Economists are debating whether r* has risen or not since then. If it is the case, it means that the economy could operate at its potential (a form of equilibrium) with higher policy rates than before.
As at end March, Loretta Mester, president of the Cleveland Federal Reserve and a voting member of the FOMC this year, said in a speech that she had raised her estimate of the longer-run federal funds rate from 2.5% to 3%.
We may eventually see a gradual rise in the longer-term appropriate funds rate as central bankers revise their estimates.
Disclaimer
This material is issued and has been prepared by a representative of BNP PARIBAS ASSET MANAGEMENT Australia Limited (“BNPP AMAU”) AFSL 223418 ABN 78 008 576 449.
This material is produced for information purposes only and does not constitute:
1. An offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or
2. Investment advice.
Opinions included in this material constitute the judgement of BNPP AMAU at the time specified and may be subject to change without notice. BNPP AMAU is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.
Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the financial instruments may have a significant effect on the results portrayed in this material.
All information referred to in the present document is available on www.bnpparibas-am.com.
