As the economy begins to show some signs of slowing down, The Bond Market Association has adjusted its economic forecasts for the remainder of 2000 and well into 2001. Further Federal Reserve tightening is expected by year-end, followed by a relatively stable year for 2001.
According to William Brown, chief economist at J.P. Morgan & Co., the Association's Economic Advisory Committee expects growth to ease to approximately 3.5%, which is "substantial slowing from the roughly 6% growth we've been averaging for the last three quarters."
The committee sees the Federal Reserve tightening by 50 basis points, to a 7% funds rate by the end of year. The committee also sees that rate holding steady throughout 2001.
"The bond market views reflect this expectation of a greater amount of tightening than is currently priced into financial markets," said William Dudley, director of U.S. economic research at Goldman, Sachs & Co. He said the committee expects a 25 basis point rise at the August 22 FOMC meeting, and another 25 basis point hike after the election in November. However, a June hike is not expected.
"The market's certainly not prepared for a June tightening at this point," Dudley said, adding that the Federal Reserve wants to observe and gather information on how much of the recent slowdown is permanent. "They will get a tremendous amount of information between the June meeting and the August 22 meeting."
As the Fed continues its tightening, the committee also sees the 10-year Treasury yield rising to slightly above 6.5%, and remaining there throughout 2001. Continued Treasury debt buybacks are also expected, with some effects to be felt in other markets. "The paydown of marketable Treasury debt will probably contribute to some further widening in credit spreads," Dudley said. "But the committee does not anticipate the paydown of Treasury debt as being disruptive to the fixed-income markets."
In the housing sector, the committee expects 30-year fixed-rate mortgages to hold steady at around 8.3% throughout 2000, and decline to about 8.2% throughout 2001. New home sales are expected to hold at last year's numbers of 900,000 units, while existing home sales are expected to decline to 4.8 million units in 2000 and 4.4 million in 2001, down from a record 5.2 million units in 1999.