As expected the Federal Reserve left interest rates unchanged at yesterday’s meeting. And as Euler Hermes had expected, the Fed also indicated that it had finished raising rates for the year. We expect the Fed to start cutting rates in 2020. In support of its decision the Fed noted that “growth of economic activity has slowed from its solid rate in the fourth quarter” and that “Recent indicators point to slower growth of household spending and business fixed investment in the first quarter.” Accordingly the Fed also downgraded its 2019 GDP forecast to +2.1% from its +2.3% estimate in December, and downgraded its unemployment rate forecast to 3.7% from 3.5%. Indeed consensus forecasts for Q1 GDP are less than +1% q/q annualized. In yet another dovish policy shift, the Fed indicated that it would end its balance sheet reduction program in September, meaning that it will stop putting upward pressure on long term rates at that point. As a result of yesterday’s actions, the yield on the 10-year Treasury note dropped 8bp, driving the yield curve down to a mere 6bp.
