Recent Federal Reserve (Fed) rhetoric has spooked financial markets, especially as uncertainty has clouded investors’ horizons. But we still believe the fundamental U.S. economic landscape is compelling, and despite market concerns, an important measure of market interest rates suggests that monetary policy remains accommodative.

As shown in the LPL Chart of the Day, inflation-adjusted interest rates are still comparatively low and well below levels that historically have preceded economic recessions. Currently, the real fed funds rate sits at 0.3% (based on year-over-year core Consumer Price Index [CPI] growth of 2.2%), below the 1.3% real interest rate we’ve averaged since the end of 1970. During that same period, the real interest rate reached an average high of 4.2% before the U.S. economy entered a recession, significantly above where rates are today.

Real Interest Rates are Below Historical Levels

“There is a disconnect between U.S. economic data and pessimism priced into financial markets,” said LPL Research Chief Investment Strategist John Lynch. “The U.S. economy is strong enough to operate at current rates, and we expect the Fed to be pragmatic and flexible enough to guide us to a soft landing.”

This has been one of the most challenging market environments to navigate since the end of the Great Recession. However, we believe strong fundamentals are still in place, and the Fed’s plans remain supportive to the economic environment. While the uncertainty has been uncomfortable, the Fed remains data-dependent, leading us to expect two rate hikes in 2019. We elaborate more on our predictions for this year in our 2019 Outlook, Fundamental: How to Focus on What Really Matters in the Markets.

For more of our thoughts on recent economic trends, check out our newest Weekly Economic Commentary: Market Fears and Economic Realities.


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