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.
This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.