December 22, 2008

The potential sources of an expected increase in economic activity during 2009 are several. The changing futures rate could reflect the market’s changing inflation expectations. On the other hand, given the inflation rate, the changing T-bill yields may reflect the market’s expectation about the economy’s future real interest and/or tax rate changes. This interpretation points to an acceleration in the real economy extending well into 2009. Finally, a case may be made that the implicit forecast is exceptionally noisy this time around. Complicating the signal extraction problem is the fact that we are in the midst of a delevering of the U.S. economy and that has created a flight to quality that, in part, explains the low and falling yields of the recent past.

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