ECONOMIC REPORT OF THE PRESIDENT

Figure 2-35
Long-Term Inflation Expectations, 2007–2015
4-Quarter Percent Change
6
5
4
3
2
1
0
-1
-2
Actual PCE
Inflation
Forecast Next
10 Years 2015:Q4
Dec-2015
-3
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Note: Shading denotes recession. The Forecast Next 10 Years is the median forecast for CPI inflation
from the Survey of Professional Forecasters. The Personal Consumption Expenditures (PCE) price index
is used to compute inflation.
Source: Bureau of Labor Statistics; Federal Reserve Bank of Philadelphia, Survey of Professional
Forecasters.
(estimated from the rates on Treasury inflation protected securities) have
declined, raising some concerns about long-term inflation expectations.
Financial Markets
Over the course of the year, developments in U.S. financial markets
largely reflected diminished prospects for global growth, particularly in
China and other emerging markets, and expected tightening of monetary
policy. At the same time, consensus forecasts of long-run U.S. interest rates
have fallen, following the long downward trend that reflects a variety of factors
ranging from demographics to changing term premiums. This section,
like the rest of this chapter, focuses on developments through the end of
2015. In early 2016, U.S. and global equity indexes and commodity prices—
especially oil—fell while spreads on high-yield bonds rose.
Since the early 1980s, long-term interest rates, as measured by the
yields on 10-year Treasury notes, have trended downward, as shown in
Figure 2-36. The evolution of U.S. interest rates over the past 20 years has
coincided with interest-rate movements in advanced economies, including
the United Kingdom and the euro area. The global trend in long-term rates
is partly the result of lower inflation, lower foreign output growth, aging
demographics, lower investment demand, and increased world saving, as
evidenced by the reduction in rates beginning well before the financial
The Year in Review and the Years Ahead | 103