U.S. interest rates have remained low due to slower global economic growth and a reversal in Fed policy. For borrowers, rates are still near historic lows even as we begin the eleventh year of the business cycle. For investors who need investment income, this continues to be a challenging environment.
Long-term interest rates in the U.S. remain low. The 10-year U.S. Treasury yield has even fallen below 2% at times. Short-term interest rates, such as the 2-year, had risen due to earlier Fed rate hikes, but may decline if the Fed continues to cut rates.
Taking a longer view, interest rates are still at the tail-end of a 35-year decline. Rates are likely to remain lower this cycle than in the past.
Short run chart
Long run chart
The U.S. Treasury yield curve continues to flatten and even invert in the middle of the curve as long rates rise more slowly than short-term rates. A flatter curve is indicative of a late economic cycle, although it doesn’t necessarily suggest that a recession is imminent.
Additionally, low interest rates around the world have increased the attractiveness of U.S. Treasuries. This places a ceiling on how high interest rates can rise in the short run.
Fed Funds Rate
The Federal Reserve is cutting interest rates. Of the Fed’s two mandates, full employment and stable inflation, only the former has unequivocally been on track to achieve long-run targets. Inflation has declined in 2019 for a variety of global economic reasons, creating a challenging environment for Fed policy.
Short Run Chart