Fed Rate Cuts Not Likely Done Yet

Long-term interest rates bounced a little after the Federal Reserve cut its short-term rate but indicated that it may stop cutting. The Fed lowered the federal funds rate by a quarter-point, to a range of 1.75% to 2%, but the “dot plot,” a chart of Federal Open Market Committee members’ expectations of the future path of interest rates, showed a gradually rising trend over the next two to three years. However, in his press conference on September 18, Fed Chair Jerome Powell again emphasized that the future path of Fed actions will depend on whether risks posed by the trade war and the global economic slowdown subside or strengthen.

The Fed will likely cut rates once more this year, on October 30, and then adopt a wait-and-see attitude on further cuts. Of course, the FOMC members will publicly expect the economy to gradually improve, and rates to therefore gradually rise. But they are keen to stay ahead of possible negative developments, and the full impact of the trade war on manufacturing has yet to be seen. Tariffs could go higher, too. Thus, members will not hesitate to cut interest rates even more next year if their expectations of economic improvement do not come true.

The bank prime lending rate will decline to 4.75% after the October cut. Rates on auto loans and consumer loans will likely edge down for borrowers with good credit. The decline in rates is likely to boost the housing market — by making mortgages easier to afford — and perhaps consumer lending, but it will not boost business borrowing much because of all the economic uncertainty.

While the trade war lasts, the yield on the 10-year Treasury note is likely to stay below 2%. Mortgage rates should stay around 3.5% for 30-year fixed-rate loans and 3% for 15-year loans.