The interest rate outlook has swung sharply since November 2018, with mainstream expectations now a full percentage point lower than they had been. For short-term interest rates (Federal Funds), the Wall Street Journal’s latest survey of economists shows average expectations of just two percent throughout 2020 and 2021, down from the recent 2.41%. The 10-year Treasury bond is expected to rise just 0.4% over the next two years from the current 2.14%


The reasons for the change in outlook—the economic growth risks and lack of confidence in inflation forecasts—are also the key issues going forward. I’m sceptical about today’s standard narrative, but also too humble to be sure that it’s wrong.

Jerome Powell’s testimony to Congress was pretty moderate in his first forecast statement: “Our baseline outlook is for economic growth to remain solid, labour markets to stay strong, and inflation to move back up over time to the Committee’s 2 percent objective.” This is a mainstream view, which I share.


Then the Fed chair talked risk: “However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.”

The second statement could be interpreted in two ways. One is that the baseline forecast is unchanged, but we acknowledge possible error on the downside. The other possible interpretation, which I think many analysts are assuming, is that the uncertainty is likely to depress economic growth. The first approach makes sense to me. The second approach is possible, but less likely. I have erred twice in recent years by connecting policy uncertainty to weak economic growth, first with respect to Brexit, and then with respect to implementation of President Trump’s policies immediately after his election.