Yellen Considers Interest Rates Return To Pre-pandemic Level 'Unlikely'
US Treasury Secretary Janet Yellen recently stated that market interest rates are unlikely to return to pre-pandemic levels.
According to the 2025 fiscal year budget proposal released on Monday, the White House now predicts a significant cooldown in the US economy in 2024, more pessimistic than many economists. Additionally, inflation will persist stubbornly above the Federal Reserve's target.
The White House forecasts a real GDP growth rate for the US of 1.7% in 2024 and 1.8% in 2025, rising to 2.2% by 2030. It predicts consumer price index (CPI) inflation rates of 2.9% in 2024 and 2.3% in 2025.
The Office also substantially raised its expectations for US bond rates: a year ago, it predicted an average three-month US bond rate of 3.8%, with a ten-year US bond average rate of 3.6% for 2024; now, it predicts 5.1% and 4.4%, respectively.
When asked why the White House's predictions released on Monday show significantly higher interest rate expectations for the coming years than a year ago, Yellen said it reflects the current market reality.
I think it reflects current market realities and the forecasts that we're seeing in the private sector - that it seems unlikely that yields are going to go back to being as low as they were before the pandemic, she said.
In the decade up to 2019, the average yield on 10-year US Treasury bonds was 2.39%, low by historical standards. Last October, Treasury yields soared above 5% after the Federal Reserve raised interest rates significantly to combat inflation; they are currently just below 4.2%.
Yellen stated, It's important that the assumptions that we built into the budget are reasonable and consistent with the thinking of the broad range of forecasters.
Responding to market concerns about inflation, Yellen affirmed the US's progress in this area, confidently indicating a downward trend for inflation and refuting market concerns about stagnation.
I regret saying [inflation] was transitory. It has come down. But I think transitory means a few weeks or months to most people, she said.
She also predicted a slowdown in housing cost increases would help to drive down US inflation in 2024. She added, It takes a while for changes in housing costs to be transmitted to the CPI. I firmly expect this single largest inflation impact factor to decline gradually this year.
According to a report from the US Labor Department released on Tuesday, core CPI, which excludes food and energy costs, rose by 0.4% compared to January and increased by 3.8% year-on-year, both 0.1 percentage points higher than expected. Economists see the core CPI as a more accurate reflection of underlying inflation.
The agency said that after a month-to-month increase of 0.3% in January's CPI, the February CPI increased by 0.4%. Gasoline and housing, which includes rent, contributed to over 60% of the monthly rise in the CPI, suggesting inherent stickiness in inflation.
Lastly, Yellen insisted that the dollar has always been a reserve currency and will continue to remain so.