Interest Rates Outlook

Following the debate between Trump and Biden, long-term interest rates rose although incoming data continue to point to downward pressure on inflation and economic growth. What is the reason for this and what does it say about the medium-term outlook for longer-term interest rates?

The Fed and the ECB have good reasons to wait to cut interest rates (further) until inflation clearly declines again. But the longer central banks wait to cut interest rates, the greater the risk of a policy error becomes. Such a policy mistake must then be repaired by sharp interest rate cuts, which will eventually lead to higher long-term interest rates and a steep yield curve.

Fickle data on the U.S. economy and labor market and increasing political uncertainty have caused wide fluctuations in U.S. and European long-term interest rates, but on balance the market is moving sideways. However, we expect the latter to change...