For several years, our annual economic outlooks have presented forecast ranges for 10-year annualized asset class returns that have been progressively lower than the year before. Lofty valuations have no doubt been part of that story for our equity forecasts, but more so it has been the near- or below-zero real interest rates that have encouraged investors to pay more now for future expected cash flows.
For several years, we’ve talked about the role of secular forces such as globalization and technology in keeping interest rates and inflation low. Central banks have found themselves challenged since the global financial crisis to push inflation up toward 2% targets. For much of that time, their concern has been deflation, not inflation.
And for several years, central banks have had reason to keep borrowing terms easy, the most recent and pronounced being the need to support economies that the COVID-19 pandemic had shut down. Recent high inflation caused by lingering pandemic supply constraints and surging demand—especially for workers—accentuates a needed end to accommodative policy.