Lower for longer but not negative. That’s the general consensus about the direction of U.S. interest rates, which the Fed is expected to support with another 25 basis-point rate cut this week.
It would be the second consecutive rate cut by the Fed, which reduced rates in late July for the first time in more than 10 years to 2% to 2.25%.
The Fed’s forward guidance will be “the important thing” for investors to follow at this week’s Federal Open Market Committee (FOMC) meeting, says Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. The two-day meeting ends Wednesday afternoon.
Jones, along with many other market economists, is expecting additional Fed rate cuts after one this week to offset the slowdown in the economy and to try to move inflation higher, closer to the Fed’s 2% target rate. She’s expecting at least two more cuts after Wednesday — one this year and one next — but not a turn to negative rates as has been the case for some other developed countries.
One of those countries — Austria — issued a 100-year government bond two years ago, with a 2.1% coupon. The bond is up over 80% year to date, far more than other investments.
The low-rate environment and growing federal budget deficit — expected to reach $1 trillion next year — has got the U.S. Treasury considering the issue of an ultra long-term bond.
Last Wednesday U.S. Treasury Secretary Steven Mnuchin said his department was considering issuing 50-year bonds “if there is proper demand” and possibly a 100-year bond if the 50-year bond is successful. An ultra-long maturity bond would allow the government to take advantage of low rates to service its growing debt load, said Mnuchin. (The U.S. budget deficit is poised to top $1 trillion next year, according to the CBO.) The 50-year bond would presumably replace the 30-year Treasury for new issues.