Weekly Economic Update: March 25th, 2019
• At the end of the Fed’s policy meeting, the FOMC announced that there would be no changes in the fed funds rate for 2019. The reduction to zero fed fund increases followed the expectations of two fed fund increases announced in December. The reduction to zero increases surprised the markets as most economists expected a lowering to one increase in 2019.
• Two-year Treasury notes dropped nine basis points while five-year Treasury notes declined by 17 basis points. The three months to 10 year Treasury curve is now inverted for the first time since 2007. The inversion between these two maturities has historically been an indicator of a pending recession.
• The Fed also announced an end of their balance sheet reduction to start in May and be done by September. This will reduce the amount of expected supply of Treasury securities which should help lower interest rates.
• The Fed expressed concerns about economic headwinds stemming from global crosscurrents. The softening of interest rates will be supportive of interest sensitive economic sectors such as housing. The positive impact of lower interest rates will make housing more affordable which could lead to an economic rebound in the second quarter.