Long-term Treasury yields remain low despite the fiscal stimulus from the Trump tax cut because of a mistaken belief on Wall Street in the theory of the ânew normalâ, said Kevin Hassett, White Houseâs top economist.
âThe previous administrationâs economistsâ¦had convinced everybody that weâre in this new normal,â that had nothing to do with President Barack Obamaâs economic policies and was âexogenous,â Hassett said on Wednesday during a moderated discussion at the Summit on the Economy sponsored by the Economic Innovation Group and the Governorâs Woods Foundation.
Hassett forecast that second-quarter growth of gross-domestic-product is likely to boost the 12-month growth rate above 3%.
âEnough of the market was convinced by the new normal guys that weâre stuck slowly [growing] forever, that one good year of 3% hasnât really changed their minds about growth five years from now,â Hassett said.
âThe question is – is it a blip?â he asked, and then went on to say that it wouldnât be.
âWhat is going to happen is weâre going to have 3% growth this year, weâre going to have 3% growth next year and weâre going to ask ourselves next year about the year after that,â he said.
âAnd as that happens, one could expect an effect on the yield curve,â he added.
The yield on the 10-year Treasury note
Â briefly rose above 3% in mid-May, a seven-year high, but has since fallen back below 2.9% since mid-June. Bond yields rise as prices fall.
The yield gap, or yield curve, between 2-year Treasurys and the 10-year note, sensitive to inflation expectations and market fears, are at the narrowest since August of 2007. The 2-year note is the most sensitive to the Federal Reserveâs efforts to normalize interest rates from post-crisis levels.
The uncanny spread tightening between 2-year and 10-year paper, is particularly notable because investors tend to demand a richer yield for lending over a longer period, with lower rates at the longer end suggesting that investors are communicating concerns about the long-term economic outlook or stagnant inflation.
Moreover, an inverted yield curve, where short-dated notes yield more than their longer-term counterparts have been an accurate predictor of recessions.
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Private forecasters donât share Hassettâs optimistic growth projections.
The Philadelphia Fedâs survey of 36 economic forecasters sees predict real GDP growth of 2.8% in 2018, 2.7% in 2019 and 1.9% in 2020.
The term ânew normalâ in these circumstances was coined by Mohamed El-Erian, the chief economic adviser at Allianz, and was popularized by former Treasury Secretary Larry Summers, who termed it âsecular stagnation.â
The basic idea is that slowing population growth would mean low investment demand contributing to slowing rate of economic expansion.