Fed Funds Rate Expectations for Hikes in 2009 vs. Now

Now that the Federal Reserve has reached 0% for its target rate, we thought it would be interesting to look at what the market expected Fed policy to look like the last time rates went to zero, during the Global Financial Crisis. Beginning January 2009, the market believed that the Fed was set to hike rates 6 times over the next 2 years. Today, we’re back at zero again — but the market expects there won’t be any hikes for the next 2 years. It’s clear the market has internalized the idea of a lower-for-longer rate, which will likely keep a cap on long-term bond yields, despite the expected record debt issuance by the U.S. Treasury this year. Against the background of today’s historically terrible, even tragic, unemployment rate — 14.7% — it’s easy to understand why rates are expected to stay so low for so long.

Notably, the implied Fed Funds rate is negative starting 8 months out from today, having just crossed that barrier this week. And while every acting Fed official who has commented on negative rates has said they’re not in the cards, many economists and former central bankers have called for them.

What does a long-term zero rate environment mean for financial advisors? As we noted recently in our Quarterly Focus & Outlook, the inability of a retirement portfolio to generate income in a zero rate environment poses new challenges for financial advisors and planners, who may need to make use of (and better understand the interaction of) assets other than U.S. Treasury bonds in retirement or income portfolios.