CBO Projects Fed Cutting Interest Rates in 2023 After Hiking in 2019

(Bloomberg) -- Those betting the Federal Reserve will cut interest rates may have to wait until 2023 to see it happen, according to new projections from Congress’s in-house forecasting unit.

The Congressional Budget Office said the Fed will keep raising rates “through the end of 2019 in response to the widening output gap and increasing inflationary pressures in the economy,” according to its annual outlook report released Monday.

“In CBO’s projections, the federal funds rate rises from 2.2 percent in late 2018 to 3.4 percent by the beginning of 2020, where it remains through 2022,” the report said. “The agency expects the Federal Reserve to then begin reducing the federal funds rate in 2023 as the output gap becomes more negative and inflationary pressures dissipate. The federal funds rate is expected to fall to 3.1 percent by the end of 2023.”

CBO Projects Fed Cutting Interest Rates in 2023 After Hiking in 2019

The U.S. central bank’s target range for its benchmark rate is 2.25 percent to 2.5 percent, with the effective rate currently 2.4 percent. Fed officials are expected to leave rates unchanged at the conclusion of a two-day meeting on Wednesday, but median projections published Dec. 19 showed policy makers thought it probably appropriate to deliver two quarter-point increases during 2019, another hike in 2020, and none in 2021.

Fed officials’ own public projections stop there. The CBO numbers, which are produced using similar economic models, extend to 2029, and therefore may provide some insight into the way central bankers are thinking about the longer-term destination for interest rates.

“In CBO’s projections, interest rates decline slightly in 2024 and 2025. The expected decline in 2024 primarily reflects a continued response to the slowdown in growth (and decreasing inflationary pressure) during the previous three years, whereas the expected decline in 2025 primarily reflects anticipated changes in monetary policy,” the report said.

The CBO said it expects the Fed to reduce the main rate in 2025 to counteract the drag on economic growth stemming from the expiration of the individual income tax cuts.

Private-sector forecasters expect the Fed to begin cutting rates in 2020 as economic growth slows, according to averages in a Bloomberg survey. Investors also see it reversing its tightening campaign next year, according to the prices of federal funds futures contracts.

©2019 Bloomberg L.P.