March 14, 2024 | Higher Forever? Even Yellen Starts to Get it: Higher Inflation & Higher Yields Are Here to Stay

By now everyone sort of knows that inflation has been re-heating in a very disconcerting way for months, and that the inflation saga is far from over. There are all kinds of discussions about the future of inflation in the US, and it seems there is a rough common denominator forming: The future of inflation in the US is more inflation – more than there was before the pandemic, when the “core PCE price index,” the Fed’s favored measure, rarely went above the 2% line, and then only briefly and by a hair.

But not a whole lot more inflation, just some more. The thinking is that fiscal priorities are fueling inflation, that the monstrously ballooned and still ballooning debt since the beginning of the pandemic needs to be dealt with through inflation, and that the time has come when the price of free money becomes known.

And this higher inflation means that interest rates will be higher – not only “higher for longer,” but higher without going back down to where they’d been in the years before the pandemic, so higher forever?

The White House released its budget proposal on Monday. It was larded with higher interest rates as far as the eye could see. And today, Secretary of the Treasury Janet Yellen was asked about that.

In the years from 2009 to the beginning of the pandemic, the 10-year Treasury yield averaged about 2.4%, according to Bloomberg.

The White House budget proposal projected that the 10-year yield would average 4.4% in 2024, up from its year-ago projection for 2024 of 3.6%, and up from the average in the decade before the pandemic of 2.4%.

And it projected the 10-year yield to average 4% in 2025 and to 3.7% in 2029!

The budget proposal also projects that the 3-month yield will average 5.1% in 2024 (it’s at 5.48% today). A year ago, the White House projected that it would average 3.8% in 2024.

And that 5.1% projection might have come out even higher if Lael Brainard, director of the National Economic Council, hadn’t intervened, according to Bloomberg’s sources.

In other words, given the new reality of inflation, both short and long-term yield projections got ratcheted upward substantially over the past year.

“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,” Yellen told reporters, according to Bloomberg.

“It’s important that the assumptions that we built into the budget are reasonable and consistent with thinking of the broad range of forecasters,” she said.

In January, she’d already hinted that yields might not go back down to prepandemic levels. “There are people who feel quite strongly that nothing fundamentally has changed, and [yields] will eventually settle back,” Yellen said, according to Bloomberg at the time. “But the strength of the economy also suggests that perhaps productivity growth and potential output growth have increased and the level [of yields] would be higher.” And so “the jury’s still out” on how far yields could still drop, she’d said in January.

Higher interest rates in combination with the ballooning debt cause interest payments to soar. But inflation inflates tax receipts, and economic growth also boosts tax receipts. So the number to watch is interest payments as a percent of tax receipts, and it’s ugly, but not as ugly yet as it was in the 1980s:

Wolf Richter March 14th, 2024

Posted In: Wolf Street

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