Risks around fed policy in a soft landing
Kieran Davies | Coolabah Capital
Chair Powell argued yesterday that the Fed's 50bp rate cut represented the FOMC “recalibrating policy down over time to a more neutral level”, where “the neutral rate is probably significantly higher than it was [before COVID]”.
Consistent with the Fed still aiming for a soft economic landing, the updated median FOMC forecasts have the policy rate falling to 2.9% by end-2026 and holding at that level in 2027, matching the median policy-maker long-run neutral estimate of 2.9%.
The FOMC has been nudging the median estimate of neutral higher all this year, with the 2.9% estimate the highest since 2018 and with the median neutral forecast previously steady at about 2.5% from 2019 to 2023.
However, the range of policy-maker estimates around the median forecast of a 2.9% neutral rate is still the widest it has been since the FOMC started publishing its forecasts in 2012.
This is seen in the 1pp range for the “central tendency” of individual policy-maker forecasts of the neutral rate from 2.5% to 3.5%, where the central tendency excludes the three lowest and three highest individual projections.
Looking at the distribution of policy-maker forecasts within this wide central tendency, it wouldn’t be surprising if the FOMC median forecast of neutral keeps edging higher, closing the gap with the roughly 3½% average estimate derived from market pricing and Fed staff models.
However, history shows that the long-term FOMC forecasts are usually wrong and if the US economy ends up in recession, the Fed will likely take the funds rate below the neutral rate into the 2s.
In such a scenario, government policy could limit the ultimate easing in monetary policy, or perhaps shorten the duration of the low in rates.
This is because both sides of politics already plan to spend more money regardless of the state of the economy and the republicans would additionally boost inflation through tariffs, planned large-scale deportations, and pressure on the Fed.
Learn how the industry leaders are navigating today's market every morning at 6am. Access Livewire Markets Today.
All prices and analysis at 20 September 2024. This document was originally published in Livewire on 20 September 2024. This information has been prepared by Coolabah Capital Ltd ACN 153 555 867 Australian Financial Services Licence No. 482238. The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer. This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. Past performance is not a reliable indicator of future performance. Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB. Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.