Investors drive rates down, too
Inflation expectations aren’t the only factor that make rate projections so difficult. The Fed, investors and economists alike are confused about how to respond to diverse and seemingly contradictory economic signals. Investors act impulsively, seeking the lower risk of bonds, when slower growth seems imminent. Sudden demand for Treasury bonds can rapidly drive down yields.
Mixed and contradictory signals on the economy makes interest rate policy more arbitrary and difficult to project. Erratic behavior by investors, rushing into bonds and then pivoting into riskier assets when the economy signals continued growth, impacts interest rates in ways that can’t easily be anticipated.
