Are financial markets’ expectations of long-term interest rates correct? - Natixis

Patrick Artus, Research Analyst at Natixis, point out that currently, the financial markets expect very small increases in long-term interest rates in the United States and the euro zone, in spite of the facts that the United States is at full employment and the ECB will have to exit quantitative easing in the future. 

Key Quotes

“Should economists take into account expectations about long-term interest rates created in the financial markets? For the United States and Germany, we compare the changes in 10-year interest rates expected by the financial markets and the changes that actually took place for 1- and 2-year horizons.” 

“Currently, the financial markets expect only very small increases in long-term interest rates in the United States and the euro zone.”

“We have, accordingly, sought to determine the reliability of these expectations about long-term interest rates created by the financial markets.”

“We see that the predictive nature of forward interest rates is zero. On average, financial markets have no ability to predict future long-term interest rates.”