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21 May 2015
How fast will the neutral fed funds rate rise? - DB
FXStreet (Barcelona) - Economists at Deutsche Bank, share their estimates for the fed funds rate, expecting a rise to 0.5% by Q4 2016.
Key Quotes
“The Fed’s narrative about the neutral rate, as detailed in a speech by Chair Yellen, is that persistent headwinds to demand have caused the real neutral rate to fall below zero. The Fed expects the neutral rate to rise gradually over the next several years as these headwinds dissipate, ultimately reaching the Fed’s longer-run estimate of about 3.75% in nominal terms.”
“We estimate that the Fed assumes that the real neutral fed funds rate will rise from about -0.3% currently, to about 0.5% in Q4 2016 and a bit more than 1% in Q4 2017. The neutral rate does not reach the Fed’s longer-term assumption (3.75% in nominal terms) until 2018 at the earliest.”
“While we would put the longer-run neutral level slightly below the FOMC median, there is also upside risk to the eventual path of Fed tightening. We think unemployment will fall more and faster than the FOMC median projection. If unemployment declines in line with the low end of the FOMC range, the Fed’s implied rate path would be close to the December 2014 FOMC median in 2016 and 2017 at around 2.5% and 3.5%, respectively.”
Key Quotes
“The Fed’s narrative about the neutral rate, as detailed in a speech by Chair Yellen, is that persistent headwinds to demand have caused the real neutral rate to fall below zero. The Fed expects the neutral rate to rise gradually over the next several years as these headwinds dissipate, ultimately reaching the Fed’s longer-run estimate of about 3.75% in nominal terms.”
“We estimate that the Fed assumes that the real neutral fed funds rate will rise from about -0.3% currently, to about 0.5% in Q4 2016 and a bit more than 1% in Q4 2017. The neutral rate does not reach the Fed’s longer-term assumption (3.75% in nominal terms) until 2018 at the earliest.”
“While we would put the longer-run neutral level slightly below the FOMC median, there is also upside risk to the eventual path of Fed tightening. We think unemployment will fall more and faster than the FOMC median projection. If unemployment declines in line with the low end of the FOMC range, the Fed’s implied rate path would be close to the December 2014 FOMC median in 2016 and 2017 at around 2.5% and 3.5%, respectively.”