Interest Rate Forecast: Remaining Low Throughout 2020

Many of us forecasters have been expecting interest rates to rise, but we’ll have to wait another year for that to happen. The key issue is economic growth strong enough to push inflation up, or at least to make the Federal Reserve worry about inflation rising. The latest economic data have dashed hopes for strong economic growth in 2020.

The GDP report of January 30 was not weak in the aggregate—up 2.1% in the fourth quarter. The details remove optimism, though. The outlook isn’t particularly bad, but neither is it very good. In this environment, interest rates will remain about where they are now.

GDP Forecast 2020-2021


Business worry about international trade resulted in a decline of spending on equipment and software the last two quarters, following two flat quarters. Business spending could surge if the United States settled all outstanding trade disputes—but that projection is a tweet away from failure. We currently have tariffs on steel and aluminum, with exceptions, plus tariffs on many Chinese goods at 25%, and another set of goods at 15% (but dropping to 7.5% soon). Other countries have retaliated with tariffs on certain U.S. products entering their countries. It’s a very complicated mess, and political leaders don’t seem to understand the complexity of global supply chains. Capital expenditures are usually predicated on a supply chain: what is best purchased from others, and what is best made in-house. With the supply chain up in the air, capital spending decisions are on hold.

Business capital spending declined in the last two quarters after two flat quarters


Nonresidential construction has also been falling, though at a fairly low rate of decline. Two long-term trends contributed to the slowdown: electronic commerce reduces the need for retail space, and the shift to open office workplaces reduces the need for office buildings. On top of that, global trade uncertainty delays factory and warehouse construction.

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