Predicting the fed funds rate

Investment Analysis Clubs Macro Economic Trends and Risks
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FOMC dot plot (screenshot from the Wall Street Journal).

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If inflation steadies at the Fed’s goal of 2% the (median projected) real yield will be 1% in 2027.

There’s plenty of disagreement but it’s clear that the FOMC doesn’t intend to go back to the negative real yields of the fed funds rate that fueled the bubbles in the asset markets. An entire generation of traders have grown up with negative real yields, especially the fed funds rate under 1% between 2009 and 2017.

https://www.wsj.com/economy/central-banking/big-rate-cut-forces-fed-to-contend-with-new-obstacles-0bc63c6a?mod=hp_lead_pos7

Big Rate Cut Forces Fed to Contend With New Obstacles

How big will the next cut be? And what is the right interest rate anyway? One thing is clear: Fed Chair Jerome Powell really wants to stick the landing.

By Nick Timiraos, The Wall Street Journal, Sept. 18, 2024

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Where is the Fed taking rates and how fast will it get there?

The Fed doesn’t know on either front. Officials often set policy with an eye toward figuring out where their interest rate is relative to a so-called neutral rate that neither spurs nor slows growth. The neutral rate can’t be observed. Before the pandemic, most Fed officials thought this neutral rate had fallen to 2.5% or lower. Now, many think the rate has risen. Possible contributors include soaring government deficits and new sources of demand for investment… [end quote]

The Fed is trying to balance the competing risks of the labor market deteriorating and inflation resurging.

Wendy

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Of course they “don’t intend” to do so. But given a deep enough recession or some sort of other financial shock, they will do so in a heartbeat.

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@MarkR darn tootin’. The question is, What is “deep enough”? Alan Greenspan began the practice of deep, long fed funds cuts during the mild 2001 recession that was never a financial crisis. (Though it was a stock market bubble collapse.) And held it long enough to generate the housing bubble that caused the 2008 financial crisis.

I wonder if the Fed learned that lesson?
Wendy

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Greenspan faced disinflation for his time as chair.

We face a trade off between growth and inflation depending on fiscal policy. If fiscal policy creates GDP growth, then FED policy can loosen.

US manufacturing will be a global deflationary force.