CBO’s projections of lower average interest rates over the coming decade are primarily the result of factors related to the recession caused by the pandemic. That recession prompted CBO to lower its forecasts of investment demand, labor force growth, and productivity growth. Those lower forecasts point to lower interest rates. The Federal Reserve’s policy actions—lowering the federal funds rate to near zero and increasing purchases of Treasury and other securities—put additional downward pressure on both short-term and long-term interest rates. The recession also caused investors’ appetite for risk to decline (and, consequently, the demand for Treasury securities to rise). CBO expects those factors to continue to weigh down interest rates over the next several years.
Beyond the next decade, CBO expects investors’ appetite for risk to increase, but at a slower pace than previously projected. CBO expects more private saving in the United States and greater net capital inflows from foreign economies than it did in last year’s projections, and those two factors put downward pressure on real interest rates. CBO has also increased its projection of the share of income paid to capital. When a greater share of income is paid to owners of capital, interest rates go up, somewhat offsetting the factors that are pushing interest rates down. CBO’s reduced projections for interest rates are consistent with signals from financial markets that participants have lowered their long-term expectations for interest rates since the agency released its long-term projections last year.
Another reason CBO lowered its projection of nominal interest rates is that it projects the average rate of inflation to be lower. The agency’s 0.2 percentage-point downward revision to CPI-U inflation over the second and third decades of the projection period accounts for 0.2 percentage points of the projected reduction in nominal interest rates over that period.
Although the agency lowered its projection of average interest rates over the projection period, it expects interest rates to rise more quickly between 2030 and 2050 than it projected for the 2029–2049 period last year, with the 10-year Treasury note rate rising to 4.7 percent by 2049, higher than was projected for 2049 last year. That steeper rise occurs because the agency increased its projection of debt as a share of GDP.