01/11/2019 | News release | Distributed by Public on 01/11/2019 12:58
Anxious investors, take heart: The U.S. Federal Reserve hears you.
Policy uncertainty and market volatility have prompted us to revise our expectations for the Fed's target for short-term interest rates in 2019. Our new baseline forecast is for a single additional rate increase, the tenth since December 2015 and perhaps the final hike of the current monetary-policy cycle. It represents a change from the 2019 outlook we published little more than a month ago, which I described in Higher but not high, my last blog post.
To be sure, Fed policymakers themselves have signaled in recent days a willingness to reconsider their path forward. Not long ago, that path included as many as three expected rate hikes this year. The latest forecast from the Fed's policy-setting Open Market Committee anticipates a couple of 2019 rate increases. Meanwhile, bond investors in aggregate now suspect the Fed will stand pat, keeping its current target of 2.25%-2.5% in place for a while. Thus, our revised baseline estimate of a one-more-and-done approach to rate-setting this year puts us between the Fed's own crystal ball and that of the bond market.
Markets underestimated the Fed in 2018 and are doing so again for 2019
Notes: The historical federal funds rate indicates the midpoint of the target range. Market forecasts reflect implied pricing from federal funds futures. Data are as of December 31, 2018.
Sources: Vanguard, Bloomberg, and the Federal Reserve.
To treat the future with the deference it deserves, however, we believe economic and market forecasts should be expressed in terms of probabilities. We don't pretend that only one outcome can occur. Instead, we consider baseline, or most likely, scenarios, as well as potential outcomes to the upside and downside. Here are our revised expectations:
While we've revised our outlook for Fed policy, our investment outlook remains unchanged. Several factors will raise the risk of recession this year, but a slowdown in growth, led by the United States and China, is the most likely outcome. We also forecast:
For additional perspective on what the future may hold for investors, please see Vanguard Economic and Market Outlook for 2019: Down but not out.