Highlights:

• The most hawkish message delivered by the Fed at the June meeting was the upward revision of the longer-term policy rate, from 2.6% to 2.8%. With that the FOMC signals that, after the easing cycle, rates are very unlikely to go back down to the very low levels prevailing before the pandemic. 

• Indeed, we now expect the Fed to bring the policy rate down to the 3.25%-3.5% range by mid-2026. This is 25pp higher than the corresponding median ‘dot’, and 50bps higher than the current FOMC median estimate of the neutral rate, yet still some 50 bps below market pricing. 

• Our estimate of the longer term, neutral, rate is around 3.1%. This is due to a combination of a temporarily higher trend growth of the economy and the projected higher net supply of Treasuries. This puts a higher floor to the descent of the long-term rates.
 

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