Q3 2023 Developments Informing Our Long-Term (10-Year) Forecasts: Global central banks have made significant progress in their fight against inflation, but the higher-for-long stance on interest rates, particularly coming from the U.S. Federal Reserve (Fed), put upward pressure on bond yields during the quarter. After last raising policy rates in July, Chair Powell announced the Fed would proceed by deciding meeting by meeting, putting the Fed in wait-and-see mode to determine the effectiveness of past rate hikes.
While core inflation data moved in the right direction over the course of the quarter, it remained elevated and above target, raising concerns among bond investors that rate cuts would get pushed out until later in 2024 and sending yields higher. Political events, including yet another debt ceiling impasse and the ouster of Kevin McCarthy as Speaker of the House of Representatives for trying to resolve it, and Fitch’s downgrade of the U.S. credit rating, also contributed to upward pressure on U.S. yields in recent weeks. Similar to the Fed, the European Central Bank (ECB) last raised rates in September but has since committed to remaining on hold to evaluate the effect of its policy.
By contrast, the Bank of Japan (BoJ) has kept rates low and unchanged, although Japanese inflation is finally at above target levels, prompting the BoJ to tweak its yield curve control policy and set the stage to potentially drop the policy altogether in 2024. Our 10-year forecast for Euro-area and Japanese inflation increased modestly compared to last quarter. Higher current bond yields and inflation forecasts have important implications for our long-term asset class forecasts.
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