Expect more than one interest rate between now and ... 2018 - Nomura

Analysts at Nomura, in respct to the recent Fed, that in the “dot” plot for the path of the federal funds rate, there was one FOMC participant who believed that the appropriate path for policy is to raise the FOMC’s interest rate target one time this year.

Key Quotes:

"On Friday, 17 June, St. Louis Fed President Bullard revealed that this projection was his and that he did not submit a longer-run interest rate forecast. 1 In effect, Bullard argued that the economy has reached a new equilibrium. It is an equilibrium with lower growth and much lower interest rates than we considered “normal” in the past. Bullard views are at odds with the consensus of the Committee in a number of respects.

First, Bullard argues that the “neutral” level of short-term real interest rates right now is about -0.6%. In contrast, Yellen said again this week that she thought that the best current estimate of the neutral real rate was about zero. More importantly, Bullard argues that the right base case assumption is that the neutral rate will stay where it is now, rather than trend higher. He certainly acknowledged that it could rise, but he argues that such changes are “unforecastable.”

We have some sympathy for Bullard’s views. We have argued elsewhere that the standard estimate of the neutral real rate, i.e., the one from the Laubach and Williams (2003) probably overstates the current level of the neutral rate.  

Nonetheless, we do expect more than one interest rate hike between now and the end of 2018."