Chart of the week: Lower for longer… longer

  • At its meeting this week, the FOMC largely remained on course with the guidance it had provided earlier this year. As expected, the FOMC announced it will begin the process of reducing its balance sheet in October 2017.1 Also as expected, the FOMC kept the target federal funds rate unchanged, yet hinted that it may raise rates again at its December meeting.1
  • Despite the Fed largely following through on earlier guidance, markets interpreted the policymakers’ statement and Chair Yellen’s subsequent press conference as mildly hawkish as investors continue to believe that rates will remain well under the Fed’s projections.2
  • Fed funds futures for the December meeting moved sharply higher – now pricing in an approximately 65% chance that the FOMC will raise rates at its December meeting, up from less than 50% probability a week ago.3 Stocks also moved lower immediately after the Fed’s statement was issued, while the yield on the 10-year U.S. Treasury note rose approximately 5 basis points before settling somewhat in the afternoon.4,5
  • Despite the market’s apparent surprise, very little changed in the Fed’s Summary of Economic Projections from June.6 In fact, perhaps the most notable change from June was a dovish one. The Fed now anticipates the longer-run federal funds rate to rise to just 2.75%, down from June’s 3.0% projection.6 Yellen noted in her accompanying press conference that the committee anticipates that interest rates’ longer-run neutral level is “likely to remain below levels that prevailed in previous decades.”7

1 U.S. Federal Reserve,
2 Bloomberg, market-implied Fed funds target rate.
3 Bloomberg, based on CME data.
4 Federal Reserve Bank of St. Louis,
5 Federal Reserve Bank of St. Louis,
6 U.S. Federal Reserve,
7 U.S. Federal Reserve,

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