When rates started to rise, they didn’t come close to levels once considered normal, ending the decade between 1.5% and 1.75%. Private-sector economists now expect them to average 2.4% over the long term, according to Blue Chip Economic Indicators. Judging by the bond market, they might have guessed high again: Ten-year Treasury note yields are just 1.9% — roughly zero, adjusted for inflation.
How could economists have gotten something so basic so spectacularly wrong? What was it about this past decade that made all their predictions go awry?
Economists have been casting around for the answer, a theory to explain their inability to peer accurately in the months ahead, let alone the years. Such a theory must do more than say “The Federal Reserve did it.” It must explain why growth was the most subdued of any expansion since the 1940s and inflation consistently ran below the Fed’s 2% target, the reasons the Fed kept rates so low.