Before the pandemic, investors saw the Fed’s estimate as a likely outcome, something that helped to hold Treasury yields down. Now, however, several economists, including Harvard University’s Kenneth Rogoff, said rates will settle at a higher level over the longer haul, thanks to factors including costlier supply chains and stepped-up defence spending.
For now, the Fed’s preferred inflation gauge is running at more than double its two-per-cent target. The 4.4-per-cent annual pace of gains for April would, if sustained, leave investors in sub-four-per-cent 10-year notes worse off over time. The bulls are counting on things to change. Not all are convinced yields are heading lower. Jim Grant, founder of Grant’s Interest Rate Observer, said he sees a “long cycle of rising rates” ahead.
A major central bank with its own currency can get the inflation rate it wants if it’s willing to persistFed policymakers, who are set to update their estimate for the policy rate over the longer run next week, last calculated it at 2.5 per cent, much the same as they did before the pandemic.
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