This archive report was first published on 5 July 2019.
As of this week, the 10-year Treasury bond yield has fallen to 2.08 percent, a significant drop from its average level in 2015. This decline is notable, especially when considering the budget deficit, which is on track to rise to 4.2 percent of G.D.P. this year, up from 2.4 percent in 2015.
Low interest rates worldwide are likely a contributing factor, as global investors find Treasury bonds appealing due to their relatively high returns compared to equivalent securities in Europe or Japan. This trend suggests that higher deficits may not come with the costs that economic theory predicted.
The Federal Reserve's interest rate hikes since 2015, based on its own economic orthodoxy, have also been called into question. The idea that raising interest rates pre-emptively can slow the economy and prevent unemployment from falling too far has been undermined by the actual results.
At the time of the Fed's first rate hike in December 2015, officials projected that the unemployment rate would be 4.9 percent and that interest rates would need to reach 3.5 percent by now to maintain economic balance and prevent inflation. However, the actual unemployment rate has fallen to 3.6 percent, and the inflation rate has remained persistently below the 2 percent target.
Furthermore, the recent movements in bond markets suggest that very low inflation is likely to be the norm indefinitely, despite the low jobless rate. The prices of inflation-protected bonds versus regular bonds imply that consumer prices will rise only 1.66 percent a year over the coming decade.
