CBO’s Assessment of the Long-Term Outlook for Interest Rates

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Congressional Budget Office October 5, 2015 CBO’s Assessment of the Long-Term Outlook for Interest Rates Social Security Trustees Working Group Washington, D.C. Wendy Edelberg Assistant Director, Macroeconomic Analysis For additional information, see Congressional Budget Office, The 2015 Long-Term Budget Outlook (June 2015), pages 116–118, www.cbo.gov/publication/50250.

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Nominal and Real Interest Rates on 10-Year Treasury Notes * Calculated using the consumer price index research series using current methods. Calculated using the CPI for all urban consumers, the real 10-year Treasury note rate averaged 2.9 percent from 1990 to 2007. CONGRESSIONAL BUDGET OFFICE 2

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Factors Pushing Treasury Rates Down Relative to the 1990–2007 Average ■ Lower rate of inflation ■ Slower labor force growth ■ Increase in the private saving because of greater income inequality ■ Lower productivity growth ■ Greater demand for safer assets CONGRESSIONAL BUDGET OFFICE 3

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Factors Pushing Treasury Rates Up Relative to the 1990–2007 Average ■ Greater federal borrowing ■ Less investment from abroad as a share of output ■ Higher capital share of income ■ Decrease in private saving rate because of an aging population CONGRESSIONAL BUDGET OFFICE 4

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Different Projections of Interest Rates on 10-Year Treasury Notes CONGRESSIONAL BUDGET OFFICE 5

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Spread Between 10-Year Treasury Notes and 3-Month Treasury Bills CONGRESSIONAL BUDGET OFFICE 6

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Examples of Sources of Uncertainty ■ Changes in risk preferences are not observable. ■ Quantifying the effects of the distribution of income is difficult. ■ Prices implied by financial markets are hard to interpret, particularly over the longer term. CONGRESSIONAL BUDGET OFFICE 7

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Average Interest Rates on Federal Debt Held by the Public ■ The average maturity of federal debt is less than 10 years. ■ Interest rates are projected to be lower on shorter-term debt. ■ Only a portion of federal debt matures each year. ■ The average rate on all federal debt held by the public is projected to be 3.9 percent from 2015 to 2040 (lower than the 4.5 percent for 10-year Treasury notes). CONGRESSIONAL BUDGET OFFICE 8

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Interest Rates on Bonds Held by the Social Security Trust Funds ■ Trust funds hold special-issue bonds that generally earn rates higher than the average on federal debt. ■ The interest rate on those bonds is projected to average 4.5 percent from 2015 to 2040. ■ That interest rate is projected to average 4.7 percent beyond 2040. CONGRESSIONAL BUDGET OFFICE 9

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