The Federal Reserve keeps interest rates unchanged and signals no more rate increases in 2019. Anthony Okolie talks with Derek Burleton, Deputy Chief Economist, TD Bank Group.
- So Derek, the Fed did not raise rates as expected. What stood out for you? Was this more of a dovish tone than you were expecting?
- Well, dovish was certainly expected. They've shifted quite a bit. They pivoted since January. That was really the turning point.
I expected a dovish shift. I did think they went a bit further than I would have expected, not so much in the language of the press release. It was more in the Fed expectations on where interest rates are going, the so-called dot. And there, 11 of 17 Fed members now expect no further rate changes this year.
- That was a big, big change there.
- That was a big shift. I think most--
- A big shift.
- --were expecting they'd still embed one on median, rather than two in December. So shift. But I think they did go a bit further. They still expect one more hike in 2020. But overall, a shift.
In terms of the asset plan, the termination of asset runoff, that was very much as markets had expected. They expect the end of balance sheet runoff to happen later this year in the fall.
- Now, you mentioned that the Fed is still looking to cut rates next year. What's your forecast on rates this year and perhaps next year as well?
- Well, there is still a bit of a wedge. We are now aligned with the Fed, roughly speaking, this year, no further rate changes. I think we're in that sweet spot right now. And I think we will be there for the foreseeable future. So we don't want to embed any further rate changes next year in the short-term side. I expect bond yields may come up a little bit. They're just so low right now with the 10-year treasury now down below 2.6.
- Yeah, we saw that come down quite a bit.
- Not sustainable. Those should pop up a little bit by 20 basis points or so later this year. But yeah, the short term, I think we're there. I think we're at a rate that will keep inflation roughly running at 2%, keep the unemployment rate fairly steady, and for growth to run at a fairly moderate rate, improved from the first quarter, which is quite weak, and pick up a little bit. So I think we're there. So that's a bit of a change, a difference.
- And one thing I want to pick up on-- you mentioned that they may have gone a little bit overboard in terms of the dovish tone. What do you think the Fed is sensitive about right now?
- Well, I think, like all of us, we expect a bit of a rebound in the second quarter. The first quarter has not been so great for the US economy. Part of that was just the knock-on effect of the market tumult at the end of last year. It was really a global story. And the first quarter is kind of showing that.
Early signs of a pickup, but I think the Fed is watching to see if they do get that rebound in the second quarter that we're all waiting for and embedded in our forecast. Because they didn't change their economic forecasts very much. Whittled this year's growth outlook down a little bit by 0.2 percentage points, 2.1%, very much aligned with our view. So embedded in that is a bit of a pickup beginning in the second quarter.
It's just there's still a lot of uncertainty. There's issues with China-US trade talks still.
- A lot of risks. And the US economy, will see the consumer gain a bit more legs going forwards? Early signs of that, but we're still waiting for more evidence.
- Derek, thank you very much for your time.
- Thank you.