US Fed funds rate to remain unchanged through 2019 and 2020

As the latest US Federal Reserve meeting approaches on 1 May 2019, a market economist at Nordic bank SEB expects the Fed funds rate to remain unchanged and the scope for short-term market reactions to be limited.

Andreas Johnson, US economist at SEB, wrote to clients: “The Fed will maintain the target range for the Fed funds rate at 2.25-2.50% at the meeting that concludes on 1 May 2019. Recent data provide little reason for the US central bank to snap out of its wait-and-see mode. The economy hit a soft patch at the turn of the year but ended the first quarter on a relatively strong note. However, low core inflation is a concern. We forecast that the Fed funds rate will be left unchanged throughout 2019 and 2020."

The scope for short-term market reactions should be limited, Johnson added. As no revised economic projections will be presented and no policy change is expected, market focus lies entirely on the wording of the statement. 

“On balance, we do not expect the wording to change considerably in either a dovish or hawkish direction as fading downside risks to near term economic activity are coinciding with concerns over low core inflation.”

SEB’s rate forecast for 2019 is in line with the Fed’s own forecast of unchanged rates, but more aggressive than the current market pricing. Markets are discounting a near 100% probability of a 25bps rate cut by year-end 2019. 

“We expect the US 10-year yield to trade most of the time below the 2.4% mark over the coming months, declining to 15-30bps below the Fed funds by the end of 2019 (i.e. 2.10-2.25%),” Johnson concluded.