• In our central scenario the US avoids recession, but only because both short- and long-term rates fall faster than expected.
  • The near-term path for the US federal funds rate implied by market pricing has shifted significantly since we finalised our forecast last month, and now lies very close to our own.
  • But the focus of this piece is long-term interest rates, which remain elevated.
  • Long-term interest rates turned a corner around the time of Jerome Powell’s decision to stop referring to the pick-up in inflation as ‘transitory’.
  • The shift in long-term interest rates reflects greater uncertainty regarding the monetary policy outlook.
  • This uncertainty is likely to fade over the coming year or two, causing long-term rates to fall faster than the market is currently pricing in.
  • We discuss a number of the risks to this optimistic scenario, including a world where investors lose faith in QE and concern looms regarding large fiscal deficits.

UK ten-year real yields, spot and forward yields from 1985 on

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