No Surprises from FOMC's November Meeting
We forecast that interest rates will stay near zero through 2024.
The Federal Open Market Committee issued its latest statement Nov. 5 and, unsurprisingly, held the federal-funds rate at 0.0%-0.25%. The vote was unanimous, with Robert Kaplan (Dallas Fed) voting in favor this time around, Mary Daly (San Francisco Fed) voting as an alternate, and Neel Kashkari (Minneapolis Fed) not voting. As was the case with the last meeting, and as will likely be the case for some time, there remains no debate that rates ought to be at zero for now. There were essentially no changes in the language of the release, with the FOMC keeping all of the language related to its updated inflation policy and pointing to a lower-for-longer interest-rate environment. No new projections were released for this meeting.
We anticipate that the FOMC will be in a holding pattern for some time, with the meetings and releases likely to be relatively mundane for a while. Instead, the Federal Reserve will have to make any more tweaks through its other tools, such as lending facilities or securities purchases. With the Fed essentially doing what it can on the monetary side of the equation, the biggest changes relating to support for the economy will likely have to come from Congress, with more fiscal support remaining the most obvious tool.
We have already updated our U.S. traditional bank models to reflect rates staying lower for longer. We now forecast that rates will stay near zero through 2024, with a gradual increase through 2027, at which point we anticipate the federal-funds rate normalizing near 2.5%. The current members of the Federal Reserve Board anticipated that the longer-run level for the federal-funds rate will be 2.5% in their most recently released projections. As we anticipated, these changes did not have a large effect on valuations of the banks we cover, generally affecting our fair value estimates by a low-single-digit percentage. What is more important is that rates do rise eventually.
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