Systematically over-predicting interest rates…why and what does that portend?

February 23rd, 2015 at 8:56 am

Over at the Upshot, but here’s the key figure which tells a heckuva story. Typically, forecasts that continuously err on one side versus more random error suggest there’s a structural change in the economy that’s left out of the model.

intrates_fig

 

Plus, you gotta love the Queen Elizabeth anecdote and picture. Not to be rude, but “how did you miss it?” I added a bit more dialogue:

QueenE

Source: NYT, with my bubble. (Hey, that’s QE with a bubble!)

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2 comments in reply to "Systematically over-predicting interest rates…why and what does that portend?"

  1. Tom in MN says:

    I don’t take this as missing a change in the structure of the economy, I take this unpredicted drop in 10 year rates as the 2 percent inflation target is too low and the Fed not accounting for that. They appear to want to predict about a 5 percent long term rate as steady state, but I think the long term rate is set by their inflation target. And as their inflation target is only a guess, they really need to reconsider it.

    The Fed will only get to normalize rates (raise their funds rate above zero) if their prediction of the 10 year rate is correct. If it’s not (and given the data above, who expects it to be?) then any increase in the funds rate will be significant tightening (previous tightenings have occurred from about 2 percentage points below the 10 year rate) and back to the zero lower bound we go.


  2. Fred Brack says:

    Is there more than one Jared Bernstein? I mean, I encounter a person by that name everywhere: on the Web, on TV, in print, in books, every-damn-where!

    Not complaining, as I’m grateful for his free instruction. But I wonder how could a single person be so productive and still have time to listen to music?


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