Congressional Budget Office October 5, 2015 CBOs Assessment of the - - PowerPoint PPT Presentation

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

Social Security Trustees Working Group Washington, D.C.

October 5, 2015

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.

1

CONGRESSIONAL BUDGET OFFICE

Interest Rates

2

CONGRESSIONAL BUDGET OFFICE

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.

3

CONGRESSIONAL BUDGET OFFICE

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

4

CONGRESSIONAL BUDGET OFFICE

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

5

CONGRESSIONAL BUDGET OFFICE

Different Projections of Interest Rates on 10-Year Treasury Notes

6

CONGRESSIONAL BUDGET OFFICE

Spread Between 10-Year Treasury Notes and 3-Month Treasury Bills

7

CONGRESSIONAL BUDGET OFFICE

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.

8

CONGRESSIONAL BUDGET OFFICE

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).

9

CONGRESSIONAL BUDGET OFFICE

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.