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Expectations about the Federal Funds Rate in the Long Run Accessible Data
Figure 1: Estimates of the Federal Funds Rate in the Long Run
This figure plots various measures of long-horizon federal funds rate expectations or projections. There are five series: the Blue Chip Financial Forecast survey, since early 2000, with the average of forecasts at a horizon 6 to 11 calendar years ahead; the Primary Dealer Survey, since mid-2012, with a median of estimates of the longer-run target federal funds rate, the Primary Dealer Survey Interquartile Range, since mid-2012; the Summary of Economic Projections, since early 2012, with a median of longer-run projections; and the Summary of Economic Projections Central Tendency, since early 2012, with a range of longer-run projections, excluding the three highest and three lowest. The Blue Chip survey measure declined fairly steadily from around 5 percent in 2007 to around 3 percent since 2016. The other measures have declined by similar amounts over the periods they are available.
Source: Wolters Kluwer Legal and Regulatory Solutions U.S.: Blue Chip Financial Forecasts; Federal Reserve Bank of New York; U.S. Federal Open Market Committee.
Figure 2: Measures of Federal Funds Rate Expectations, June 2019 Primary Dealer Survey
This figure plots two series based on responses to the July 2019 Survey of Primary Dealers. First, the most likely outcome for the federal funds rate at the ends of 2019, 2020, and 2021 of the median respondent. Second, the average expectation at the same horizons of the average respondent, as estimated from conditional distributions for the federal funds rate. The most likely outcome was that the federal funds rate would fall from about 2.4 percent to 1.9 percent by the end of 2019 and then remain constant until the end of 2021. The average outcomes for 2020 and 2021 are substantially below the most likely case, declining to about 1.4 percent at end-2021.
Source: Federal Reserve Bank of New York; Board staff calculations.
Figure 3: Probability that the Federal Funds Rate Will Be below 0.25 Percent
This figure plots two sets of four time series showing probabilities that the federal funds rate will be below 0.25 percent at the ends of 2018 through 2021. The first set of four series is based on responses to the Survey of Primary Dealers, estimated from average distributions conditional on returning to the zero lower bound. The series for the end-2018 horizon is shown from January 2016 through July 2016. The series for the end-2019 horizon is shown from September 2016 through July 2017. The series for the end-2020 horizon is shown from September 2017 through July 2018. And the series for the end-2021 horizon is shown from September 2018 through July 2019. The second set of four series show estimates of the same set of probabilities based on eurodollar options quotes, adjusted for the differences in levels and option-implied volatilities of Libor and the federal funds rate. The series for the end-2018 horizon is shown from January 2016 through August 2018. The series for the end-2019 horizon is shown from September 2016 through August 2017. The series for the end-2020 horizon is shown from September 2017 through September 2018. And the series for the end-2021 horizon is shown from September 2018 through September 2019. The survey-based probabilities have ranged between about 10 and slightly above 20 percent. The option-implied probabilities were close to the available survey-implied probabilities until late 2016 but fell sharply in late 2016 and have since generally remained below 15 percent.
Source: Federal Reserve Bank of New York; CME Group: DataMine; Board staff calculations.
Figure 4: Measures of Long-Horizon Federal Funds Rate Expectations
This figure shows four measures of long-horizon federal funds rate expectations. The series included are the average of responses to the Blue Chip Financial Forecasts long-horizon survey, the 5-to-10-year forward rate implied by yields on Treasury securities, an estimate of 5-to-10-year ahead short rate expectations from a standard shadow rate term structure model, and an estimate of 5-to-10-year ahead short rate expectations from a shadow rate term structure model with regime-switching dynamics. The Blue Chip survey measure declined fairly steadily from about 5 percent in 2007 to about 3 percent since 2016. The forward rate generally fluctuates around the Blue Chip survey but has a similar downward trend. The two model-based estimates are generally lower than and weakly correlated with the survey and forward rate.
Source: Wolters Kluwer Legal and Regulatory Solutions U.S.: Blue Chip Financial Forecasts; Federal Reserve Bank of New York; Andreasen, Jorgensen, and Meldrum (2019); Board staff estimates.
Figure 5: Measures of Long-Horizon Federal Funds Rate Expectations
This figure shows four measures of long-horizon federal funds rate expectations. The series included are the average of responses to the Blue Chip Financial Forecasts long-horizon survey, an estimate of 5-to-10-year ahead short rate expectations from a standard shadow rate term structure model, an estimate of 5-to-10-year ahead short rate expectations from a shadow rate term structure model with regime-switching dynamics, and an estimate of 5-to-10-year short rate expectations from the term structure model of Kim and Wright (2005). All of the model-based measures incorporate data from surveys in the data set used for estimation. The Blue Chip survey measure declined fairly steadily from about 5 percent in 2007 to about 3 percent since 2016. The estimates based on shadow rate models generally track the survey closely, although the survey is generally lower over the last few years of the sample. The estimate from the Kim and Wright (2005) model remains closer to the surveys since 2016.
Source: Wolters Kluwer Legal and Regulatory Solutions U.S.: Blue Chip Financial Forecasts; Andreasen, Jorgensen, and Meldrum (2019), Kim and Wright (2005).
Figure 6: Measures of the Natural Federal Funds Rate and Long-Horizon Federal Funds Rate Expectations
This figure shows the average of responses to the Blue Chip Financial Forecasts long-horizon survey and four model-based estimates of the natural federal funds rate. The four model-based estimates are computed as the sum of long-horizon inflation expectations plus the natural real rate estimates from Laubach and Williams (2003, 2016), Kiley (2015), Johannsen and Mertens (2018), and Holsten et al (2017). The Blue Chip survey measure declined fairly steadily from about 5 percent in 2007 to about 3 percent since 2016. The model-based estimates imply similar net declines over this period.
Source: Wolters Kluwer Legal and Regulatory Solutions U.S.: Blue Chip Financial Forecasts, Laubach and Williams (2003, 2016), Kiley (2015), Johannsen and Mertens (2019), Holsten, Laubach, and Williams (2017); FRB/US Model Data Files; Board staff calculations.