The GDPNow indicates growth is high

 

Why are long-term interest rates so high? One reason is that growth is well above trend, with the Atlanta Fed GDPNow forecasts for Q3 well above the Blue Chip consensus. The economy is doing well, which suggests that real rates should be higher. This could be embedded in bond rates, even though forecasters’ consensus is closer to 2.5%. Note that even at 2.5% growth with more than 3% inflation, nominal longer-term bonds should be above 5.5%. Now, is it likely that we will see real growth above 2.5% or 3% over the next 10 years? Unlikely, but if expectations are short-term focused, the bond market isn’t unreasonable.