Where are interest rates trending in 2019? No one know exactly, but to quote CBRE’s Chief Global Economist, Richard Barkham, “They are likely to stay lower for longer.”
Let’s examine CBRE’s “house views” on interest rates and the outlooks of other economic groups.
First, focusing on the 10-year Treasury yield, the benchmark rate reached a recent-year peak of 3.24% in early November 2018 and then drifted down to end 2018 at 2.69%. As of February 20th, the rate was 2.65%.
The outlooks for the 10-year rate range between almost no change to only moderate increases, specifically between 2.8% and 3.2% for Q4.
Our economic forecasting group, CBRE Econometric Advisors (CBRE EA), is predicting the 10-year to rise gradually over the year to 3.2% (Q4 2019 average). While this projection would translate into a 50-bps increase in 2019, the 4Q average would still come under 2018’s peak, and certainly is low on an historical basis.
Oxford Economics, another leading economic forecasting firm used regularly by CBRE, believes the 10-year will stay essentially flat this year, inching up only to 2.80% by Q4.
Both CBRE EA and Oxford Economics forecast steady economic expansion in 2019, albeit slightly lower than 2018. Their respective GDP forecasts are 2.4% and 2.5% compared to the 2.9% expected for 2018 (the first estimate of the Q4 GDP comes out on Thursday).
The Wall Street Journal’s “Economic Forecasting Survey” (consensus survey of more than 60 leading economists) projects the 10-year note to inch up to 2.91% by June and then 3.02% by December (the consensus GDP outlook for 2019 is 2.3%).
With respect to short-term rates, understanding how the Federal Reserve Bank is reading the economic tea leaves is the best approach. The most important indicator this year may be the inflation rate that could gain traction especially if wage growth rates continue to rise. On the other hand, trade tensions and the slowing global economy, could both have counter effects on the economy.
Fed Chair Jerome Powell has indicated that the Fed will likely be more conservative in adjusting the short-term Federal Funds rate in 2019 compared to last year (with four hikes).
The Federal Funds rate was about 2.38% at the end of 2018. The Wall Street Journal’s consensus survey suggests that the Federal Fund rate will rise to 2.65% by the end of 2019 – indicating that the survey respondents are split between the Fed making one and two rate tweaks this year.
CBRE EA currently expects two rate hikes in 2019 (second half of the year) while Oxford Economics projects only one rate hike (in Q3).
By Jeanette Rice, Americas Head of Multifamily Research, CBRE.