Some economic shocks look like bumps in the road -- tariffs, to which businesses adjust, or a war with Iran that raises oil prices temporarily. But economists increasingly believe that higher U.S. interest rates will define the rest of the decade.
So concludes The Wall Street Journal's latest survey of forecasters. The surveyed analysts don't see the recent surge in long-term yields to quarter-century highs as a temporary blip that will fade as inflation cools. Instead, they expect higher long-term yields to be sustained.
Treasurys set the tempo for borrowing costs across the economy. Higher yields mean higher mortgage rates and more expensive borrowing for companies. They also increase the burden on the federal budget, where interest on the national debt now exceeds military spending.
The 71 analysts who submitted projections in the survey from Oct. 2-7 now expect the benchmark 10-year yield to end 2026 at 5.1%, up from 4.4% the last time we asked, in July. Not all respondents answered every question.
Higher yields are expected to persist. Forecasters see a 10-year yield of 4.96% halfway through 2027 and 4.78% at the end of 2027, up from 4.3% and 4.26% in July projections.
A mix of improving growth, new inflationary pressures and concerns about the U.S. fiscal trajectory have pushed bond yields higher since the start of the summer. Many economists said the cocktail has forced them to re-evaluate their assumptions about investors' demand for Treasurys, whose yields rise when their prices fall.
"It has been a sea change in the fundamentals underlying the fixed-income market and the economy," Allen Sinai, president of consulting firm Decision Economics, said in an interview.
He said that even after the Federal Reserve's first interest-rate increase in three years last month, the central bank has fallen behind in the battle to tame inflation. Sinai said it would take more than one hike to smother inflation, which the Fed appeared to acknowledge with its September projections. Those showed the Fed's short-term interest-rate target, the federal-funds rate, topping 4% this year and staying there through 2027.
"The fundamental sea change for me was the recognition of that by the Fed," Sinai said. He forecasts that the 10-year yield could rise to nearly 6% next year and remain above 5% through the 2020s. Yields on Treasury securities are heavily influenced by investors' expectations for how the Fed will set interest rates in coming years.
The rise in yields comes despite little change in expectations for growth in gross domestic product or inflation.
Much of the recent increase in inflation is because of higher oil prices, which economists expect to recede: They forecast that the U.S. oil-price benchmark will end the year at $88 a barrel, compared with $91.85 on Friday, and slip below $80 by July.
As a result, they expect inflation as measured by the consumer-price index of 3.5% in December, 2.6% next June, and 2.3% at the end of 2027. That has changed little from three months ago. The inflation gauge that the Fed tracks, the personal-consumption expenditures price index, is forecast to cool to 2.4% by the end of 2027, from 3.5% at the end of this year.
Carl Tannenbaum, chief economist at Chicago-based Northern Trust, said factors beyond the inflation outlook have pushed up expected yields.
Inflationary pressure from the Iran war could abate if the conflict winds down, which would help ease yields, all else equal, he said. But investors will remain nervous about the large and growing U.S. debt burden, while the AI infrastructure build-out could lift growth expectations and demand for capital, Tannenbaum said. He sees the 10-year yield around 5.2% through 2028, before falling to 5% by the end of 2029.
Yields at that level would strain the federal budget. In February, the Congressional Budget Office projected that the 10-year Treasury yield won't exceed 4.3% for the rest of the decade. The White House Office of Management and Budget is even more optimistic, projecting yields falling into the mid-3% range later this decade.
Economists penciled in higher expected growth this year. They now expect GDP to increase by 2.4% in 2026, up from their 2.1% July projection. That mostly reflects upward revisions to second-quarter growth and interim data suggesting the economy might have grown by an annualized rate of more than 3% in the third quarter. Survey respondents see growth slipping back thereafter, to 2.1% or 2.2% for the rest of the decade.
Likewise, forecasters don't anticipate much drama in the labor market. On average, they think unemployment will hang around 4.2% through 2029, little changed from the 4.2% unemployment rate in September. They put the probability of recession in the coming 12 months at 24%, barely budged from 25% in July.
Not all forecasters agree that yields will stay high. Rajeev Dhawan, an economist at Georgia State University, thinks that the labor market is more fragile than it appears. Over the past six months, the economy has added a solid 66,000 jobs a month on average, but few have been in the most lucrative fields such as finance and tech, he said.
In Dhawan's view, a weaker labor market could force the Fed to reverse course and bring rates lower again in the near future, which could pull down bond yields.
"The labor market's got a white-collar job malaise," Dhawan said. "Once the Fed realizes it isn't as strong, they will pivot to rate cuts."
The midterms
Economists were asked to evaluate how next month's midterms might affect inflation and growth. Of the 52 who responded, 48% said inflation risks will be greatest if Republicans keep both houses of Congress, versus 10% who said that Democratic control would generate more inflation. The remainder saw no meaningful difference.
Tannenbaum said that if Republicans keep control of Congress, they might work with President Trump to pass more tax cuts or increase spending, which could foster inflation.
A Republican sweep "would certainly open the possibility of additional fiscal expansion in the next couple of years," he said.
A quarter of respondents thought growth would be highest with a Republican Congress; 13% said that of a Democratic sweep. Another 19% said growth would be highest if Democrats gained control of either the House or the Senate but not both. The rest saw no difference.
Kevin Warsh
Asked to assign a letter grade to Kevin Warsh, who became chairman of the Fed in May, 36% of respondents said it was too early.
About 31% gave Warsh a B, 20% a C, and 9% an A.