Weak long-term economic growth won't necessarily translate into lower interest rates, according to private-sector forecasts, despite the Congressional Budget Office and many Federal Open Market Committee members' belief, according to a Federal Reserve Bank of San Francisco
If the private forecasts are correct, "future downward pressure on interest rates may be more muted than indicated by current monetary and fiscal policy projections, which would translate into an upside risk to these longer-term interest rate forecasts, according to authors Sylvain Leduc and Glenn D. Rudebusch.
"Over the past two years, both monetary and fiscal policy projections have been based on the view that declines in the long-run potential growth rate of the economy will in turn push down interest rates," according to Leduc a vice president in the Bank's Economic Research Department and Rudebusch, director of economic research and executive vice president in the Bank's Economic Research Department. "In contrast, examination of private-sector professional forecasts and historical data provides little evidence of such a linkage. This suggests a greater risk that future interest rates may be higher than expected."
