Fed again poised to cut longer-run interest rate forecast

Tue Sep 20, 2016 1:05am EDT
 
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By Ann Saphir and Jonathan Spicer

SAN FRANCISCO/NEW YORK (Reuters) - U.S. Federal Reserve policymakers are set this week to again cut their forecasts for how high interest rates will need to go in an economy where output, productivity and inflation are growing at a slower pace than in past decades.

It would be the fourth time in 15 months that the U.S. central bank has been forced to admit its estimate of this so-called neutral rate was too optimistic, raising questions about the health of the economy in the coming years.

The Fed, however, still insists low interest rates and its large balance sheet of bonds are sufficient to continue bolstering economic growth.

Conversations with Fed officials suggest some will cut their predictions for the longer-run rate at this week's monetary policy meeting, with the median forecast possibly falling to 2.75 percent. It was 3.75 percent in June 2015 and 4.25 percent four years ago.

The Fed is expected to leave its benchmark overnight interest rate unchanged following its two-day meeting on Wednesday, according to a Reuters poll of economists.

The Fed's policy rate has been about 0.38 percent since it was raised in December, the first increase in nearly a decade.

The expected reduction in the longer-run neutral rate forecast amounts to a lower speed limit on future rate hikes, and points to fewer increases with longer gaps between them than U.S. central bankers and investors had expected.

The lower the neutral rate forecast, the less anxious the Fed needs to be about tightening policy, which would justify its repeated decisions to defer rate increases.   Continued...

 
The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque