(Bloomberg) – U.S. Treasury Secretary Janet Yellen said it is “unlikely” that market interest rates will return to levels prevailing before the Covid-19 pandemic caused a wave of inflation and rising yields.
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Asked why the White House forecast released on Monday showed significantly higher expectations for interest rates in the coming years compared to expectations a year ago, Yellen said the new numbers were in line with private sector expectations.
“I think this reflects the current market realities and the expectations that we are seeing in the private sector — where yields seem unlikely to return to the lows they were before the pandemic,” Yellen told reporters Wednesday in Elizabethtown. ,Kentucky.
The yield on 10-year U.S. Treasury bonds averaged 2.39% in the decade through 2019 — a low level by historical standards. It rose above 5% last October after the Fed aggressively raised interest rates to combat inflation, and is now just below 4.2%.
There has been much debate among economists about whether interest rates will return in the long run to pre-pandemic levels or stabilize at higher levels.
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“It is important that the assumptions we have built into the Budget are reasonable and consistent with the thinking of a wide range of forecasters,” the Chancellor said.
Yellen has hinted in recent weeks that her views on the issue have changed. In January 2023, it indicated that lower interest rates were likely to return. But she said last January that “the jury is still out” on that question.
The new White House forecast was part of President Joe Biden's $7.3 trillion fiscal year 2025 budget proposal. They now assume that average interest rates on three-month and 10-year US Treasury bonds and securities will be significantly higher over the next three years than they expected one year ago.
Higher expectations
The three-month interest rate, for example, will average 5.1% this year, up from the 3.8% expected last March, White House officials said. Expectations for the 10-year bond yield rose to 4.4% from 3.6%.
The latest projection might have been even higher had it not been for the intervention of Lael Brainard, director of the National Economic Council, according to people familiar with the matter before the release.
Higher interest rates on America's growing debt burden add significantly to the overall deficit and debt numbers. Under current assumptions, the White House expects the United States to spend about $890 billion, or 3.1% of GDP, on net interest expenses this year.
Yellen spoke as she traveled to Kentucky to tout the Biden administration's economic policy record, part of her stepped-up efforts this year to address domestic audiences in the lead-up to the 2024 election.
(Updates with background on Treasury yields in fourth paragraph.)
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