(Bloomberg) -- US Treasury Secretary Janet Yellen said it's “unlikely” that market interest rates will return to levels that prevailed before the Covid-19 pandemic triggered a wave of inflation and higher yields.
Asked why White House projections released Monday showed markedly higher expectations for interest rates in coming years compared with projections a year ago, Yellen said the new numbers were in line with private sector forecasts.
“I think it reflects current market realities and the forecasts that we're seeing in the private sector — that it seems unlikely that yields are going to go back to being as low as they were before the pandemic,” Yellen told reporters Wednesday in Elizabethtown, Kentucky.
The yield on 10-year US Treasury notes averaged 2.39% in the decade through 2019 — low by historical standards. It spiked above 5% last October after the Federal Reserve raised rates aggressively to combat inflation, and now sits just below 4.2%.
A considerable debate has emerged among economists over whether, in the long run, rates would return to pre-pandemic levels or settle higher.
Read more: Rogoff Says Biden, Trump Favor ‘Blowing Up' Debt, Low Rates Over
The Treasury chief said “it's important that the assumptions that we built into the budget are reasonable and consistent with thinking of the broad range of forecasters.”
Yellen has hinted in recent weeks that her own views on the issue had shifted. In January 2023, she indicated it was more likely that low rates would return. But this January she said “the jury's still out” on the question.
The new White House projections were part of President Joe Biden's $7.3 trillion fiscal 2025 budget proposal. They assume now that the average rates on three-month and 10-year US Treasury bills and notes will be markedly higher over the next three years than they anticipated a year ago.
Higher Forecast
The three-month rate, for example, will average 5.1% this year, up from the 3.8% projected last March, White House officials said. The 10-year yield projection rose to 4.4% from 3.6%.
The latter projection might have been even higher but for the intervention of Lael Brainard, director of the National Economic Council, according to people familiar with the matter prior to the release.
Higher rates on the growing burden of US debt add significantly to the overall deficit and debt figures. Under the current assumptions, the White House expects the US to spend about $890 billion, or 3.1% of gross domestic product, on net interest expenses this year.
Yellen spoke as she traveled to Kentucky to tout the Biden administration's economic policy record, part of her stepped up efforts this year to address domestic audiences in the run-up to the 2024 elections.
(Updates with background on Treasury yields in fourth paragraph.)
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