Interest rates, yields to stay higher for a long time, warns former IMF Chief Economist

Concerns that growing Federal deficits require higher yields to absorb more Treasury supply has been illustrated by a sharp rise in real or inflation-adjusted Treasury yields that suggest investors are demanding a higher premium to hold US debt.

“I think there are a lot of fundamentals pointing to high real rates,” said the Harvard University professor. He added that the US will need to spend more on defense, the green transition “is going to involve a lot of big investments,” and that the retreat of globalization is another factor “if only because China is slowing.”

What might reverse the current trend of higher rates? Any signs that they “start feeding back into the real economy and you start having an effect on investment,” Rogoff said

Asked whether the US economy can live with 5% interest rates, Rogoff replied, “Interest rates have gone up and maybe we will hit recession at some point, but the economy has not fallen apart as much as you think. The economy is adjusting.”

In June, Rogoff told Bloomberg the yield on the 10-year Treasury note would average above 4% for the rest of the decade.