All year long, the market has been sending a message that the Fed until recently refused to heed — namely that the central bank's desire to raise interest rates on a regular basis isn't going to happen.
Now, "lower for longer" is working its way into replacing all of the various wordplay incrementalism that has marked Fed policy statements and speeches. Markets have been obsessing over a central bank that has time and again been unable to deliver on its promises — or threats, depending on your perspective — to normalize interest rates after eight years of highly accommodative policy.
But the idea that the Fed is stuck in the low-rate regime for longer than virtually anyone imagined is slowly taking root, and is the subject of much discussion and analysis on Wall Street.
"Are super-low interest rates here to stay? There is a growing consensus that they are," Josh Feinman, chief global economist at Deutsche Asset Management, wrote in a report for clients.
"This is one reason policymakers have been slow to raise rates; they're not only wary of heightened global stresses, lingering slack, below-target inflation, and asymmetric risks near the zero bound, and hold out hope that supporting demand can help repair at least some of the damage to potential output ... they also increasingly judge that the neutral rate will remain lower for longer," he added.
Feinman starts with the premise that the "neutral rate," or the short-term rate needed to keep the economy growing and inflation stable, is lower than most experts believed. The view has been espoused by leading thinkers like economist Larry Summers and, more recently, bond king Bill Gross and former Fed Chairman Ben Bernanke, who explored the issue in a recent blog post.
A low neutral rate means the Fed can keep its own funds rate low, which translates to muted rates across the board.
"The economy's unusual performance in recent years — abnormally low interest rates, slower-than-anticipated growth yet greater-than-expected declines in labor market slack juxtaposed against persistently below-target inflation — has left many (both inside and outside the Fed) scratching their heads, less certain of many things, including the neutral rate, potential growth, and slack," Feinman wrote.