Official US interest rates estimates too low

Phil Robotham

We’ve long felt the official estimate of where US interest rates may settle in the long term has been too low.

Official estimate of future US base interest rate creeps higher

The Federal Reserve's (Fed’s) estimate of where the Fed funds rate will be in the long term increased by 0.5% points over the course of 2024 to 3.0%, from 2.5% at the end of 2023. This is a move away from a level more consistent with very low borrowing costs, like those seen in the wake of global financial crisis of 2007/08 and prior to the Covid -19 pandemic.

Schroders estimate of future US base interest rate still exceeds the official one

We estimate that in the long term, the fed funds rate will be sitting at 3.5%. Otherwise known as ‘’neutral’’, this is the required (theoretical) interest rate to keep the economy in balance. This level should permit growth and inflation to settle back onto stable paths and could be closer to 4%. We’ve long felt a strong US economy means the official estimate has consistently been too low.

Limited scope for further cuts to US base interest rate

The upper band of the US base interest rate was 4.5% following the latest cut by the Fed which was cut by 0.25% points in December to take the target range to 4.25% - 4.5%. With the neutral rate now coming into view, We believe the scope for further cuts may be limited.