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US: a higher neutral rate may limit the fall in long yields

In breve

At the June meeting, the Fed disappointed markets by signalling only one rate cut in 2024 in its median projections by FOMC members. However, the disappointment was mild as it left the door open to two cuts, which remains our baseline. The most hawkish message, and the one with a potentially stronger bearing for Treasury yields, was the upward revision of the neutral, longer-term rate from 2.6% to 2.8%.

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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US: a higher neutral rate may limit the fall in long yields
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