New Normal Interest Rates?

There’s been much discussion in the financial world around the possibility of an extended period of low interest rates. In other words, there is a “new normal” equilibrium interest rate. The Congressional Budget Office appears to agree with this view. CBO issued its annual Budget and Economic Outlook in late January, which includes the following interest rate forecast:

Forecast Period: 2021 – 2026

Nominal 10-Year
Treasury Rate 4.1%

Inflation Forecast 2.4%

Real 10-Year
Treasury Rate 1.7%

For comparison, CBO uses the average real 10-Year Treasury rate from 1990 to 2007, which is similar to the forecast period. The average rate in the comparison period was 2.9%, which is 71% above CBO’s forecasted rate of 1.7%.

As Yogi Berra said, “It’s tough to make predictions, especially about the future.” Nobody expects CBO to hit the bullseye 10 years from now. The point is that mainstream opinion now expects interest rates to remain below historical averages for an extended period.

The CBO Budget and Economic Outlook: 2016 to 2026 can be found here.

by Nick West, Barry Slatt Mortgage Director