Factors Affecting Interest Rates. Interest rates are determined by a number of factors. CBO projects those rates by comparing how the values of factors that affect them are expected to differ in the long term relative to those factors’ average values over the 1990–2007 period. That period was chosen for comparison because expectations of inflation were stable and there were no severe economic downturns or significant financial crises.19

Some factors reduce interest rates; others increase them. In CBO’s estimates for the 2020–2050 period, several factors tend to reduce interest rates on government securities below their 1990–2007 average:

• The labor force is projected to grow much more slowly than it did from 1990 to 2007. Slower growth in the number of workers tends to increase the amount of capital per worker in the long term, reducing the return on capital and, therefore, also reducing the return on government bonds and other investments.20
• The share of total earnings received by higher-earning households is expected to be larger in the future than during the 1990–2007 period. Higher-income households tend to save a greater proportion of their income, so the difference in the distribution of earnings is projected to increase the total amount of saving available for investment, other things being equal. As a consequence, the amount of capital per worker is projected to rise, and interest rates are expected to be lower.
• TFP is projected to grow more slowly in the future than it did from 1990 to 2007. For a given rate of investment, a lower rate of productivity growth reduces the return on capital and results in lower interest rates, all else being equal.
• CBO expects investors’ preference for Treasury securities over riskier assets to remain greater than it was during the 1990–2007 period. Investors began to have less appetite for risk in the early 2000s, and the demand for low-risk assets was strengthened by the economic fallout from the 2007–2009 recession, the slow expansion that followed, and the response of financial institutions to increased regulatory oversight. The recent recession caused by the pandemic further increased investors’ demand for Treasury securities instead of riskier assets. That greater demand contributed to lower interest rates for Treasury securities. CBO expects the preference for Treasury securities to gradually decline over the next three decades but to remain stronger than it was from 1990 to 2007.

At the same time, in CBO’s estimates, several factors tend to boost interest rates on government securities above their average over the 1990–2007 period: