One of the more interesting phenomena in the economy these days is the seeming disconnect between economists’ muted forecasts of long-term interest rates and the arrival of expansionary fiscal policies next year.
According to the Bloomberg consensus of economists’ forecasts, the U.S. 10-year Treasury is expected to end next year at 4.07%, just below the current 4.09%, while the estimate on the 30-year stands at 4.61% compared to the current 4.69%.
One would think that under current conditions given the imminent arrival of tax cuts and the full expensing of capital expenditures, yields would be rising to reflect greater risk taking as investors and the government compete for scarce capital.
But the economic forecasting community expects that these policies will result in a only a 1.8% growth rate next year.
What gives?
In our estimation, long-run yields remain muted because of pervasive uncertainty linked to the policy incoherence around trade, the status and constitutionality of tariffs, restrictive immigration policies, and the impact of the longest government shutdown in U.S. history.
If economic history was any guide, rates should be rising. Expansionary policies like these, like the Reagan tax cuts of the 1980s, have traditionally spurred strong growth, and what’s more, inflation is back on the rise, increasing by 3% over the past year and by 3.6% at an annualized pace over the past 90 days.
Investors, like businesses, crave certainty. Until a semblance of certainty returns to the American economy and financial markets, long-established behaviors and relationships are likely to be undone.
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