When The Fed Eventually Cuts Rates, The Endgame Will Be A 0-1% Fed Funds Rate
When the Fed eventually cuts rates, the endgame will be a 0-1% Fed Funds rate. The Fed can’t hold Fed Funds at 5% in perpetuity given the United States’ $34.4 Trillion debt load.
The Fed could take rates down to 0-1% in short order if Banks hit a wall again as they did in March 2023. The risk of that happening sometime in 2024 is better than 50% so long as yields remain elevated (elevated yields draw capital out of banks into Treasuries and Money Market funds). The BTFP provided some air cover to banks in the form of additional liquidity, but that air cover won’t last forever.
A smart Fed would lower the Fed Funds rate while simultaneously reducing its balance sheet holdings at a similar pace to the Fed’s QE program during 2020-2022.
I won’t put too much weight on the Fed’s summary of economic projections - which will be published Wednesday - given that the Fed will throw its rate plan out the window should the economy hit a wall. The economy has already hit the wall in my view.