Interest Rate Commentary – October 2021

Federal Reserve Comments & Projections

• In response to economic fears from COVID-19, the U.S. Federal Reserve initiated a series of Fed Funds rate cuts (including an emergency rate cut) to bring the Fed Funds target rate to 0.00% – 0.25% as of March 15, 2020. 
• After a short period of shrinking, the Federal Reserve’s balance sheet began growing again in September 2019.  It stood at about $4.2 trillion in late February 2020.  In March 2020, a variety of asset purchase programs to provide liquidity to asset markets increased the balance sheet’s size.  Assets total $8.6 trillion as of October 18, 2021.
• During the August 2020 Economic Policy Symposium, the Fed announced a meaningful policy shift.  Previously, the Fed would aim to avoid inflation rates above 2% in the short term.  Now, the Fed will focus more on average inflation over longer periods of time.  In its March 2021 statement, the Fed reaffirmed its short-term goal of achieving inflation “moderately above 2 percent for some time” to balance past periods of inflation below 2%.
• The Federal Open Market Committee published its members’ forecasts for the Fed Funds rate on September 22, 2021, with the median projected rate at 0.25% at the end of 2023. 
• The FOMC’s median long-term estimate of the Fed Funds rate is 2.5%.

Cornerstone Comments & Projections

• The Federal Reserve’s swift reduction of the Fed Funds rate to close to 0.00% was likely necessary.  However, its purchase programs covering a broad set of fixed income assets perhaps had a larger impact on stabilizing investment markets.
• The Fed’s statement from its September 2021 meeting indicated that a tapering of these asset purchases may begin as early as mid-November.  Assuming there are no economic disruptions, the asset purchases will likely end in mid-2022.  As justification for the reduction in monetary support, the Fed stated that it believes that the U.S. economy is close to the Fed’s goals.
• Fed Funds futures markets predict year-end Fed Funds close to the FOMC’s forecasts through 2024.   The futures rates (as of September 30, 2021) are quite low – 0.1% for 2022, 0.3% for 2023, and 0.9% for 2024.
• Intermediate-term Treasury yields closed Q3 2021 slightly higher than they were at the end of Q2 2021.  As of October 25, the five year Treasury yield is 1.2%.  The ten year yield is 1.6%.  A 30-year Treasury Bond is yielding 2.1%.  These rates are still quite low relative to long-term historical averages.
• Inflation has recently spiked, though a return to more normalized levels is expected once supply chain and labor conditions ease.  That said, inflation over the next few years is expected to exceed inflation experienced over the previous decade.

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