Economic Projections

Since the election of President Reagan in November 1980, the inflation rate has declined from the 10-11% area to about 8% in response to monetary restraint and slack in the economy. Despite many forecasts that inflation will continue to decline to the 6-7% area over the next 12 to 18 months, government bond rates remain near 14%, compared with a 12% rate in November 1980 and single digit rates as recently as October 1979. Following a decline in late 1981, short-term rates have recently risen above November 1980 levels, suggesting that double digit rates will persist throughout 1982. Whether the rise in nominal rates reflects a rise in real rates or expectations that inflation will reaccelerate, economists both outside -and inside the Administration perceive the rise in rates as a "no confidence" vote on Reaganomics from the financial markets. Unless confidence is restored, a major Reagan Administration objective -- to promote capital formation and productivity growth -- cannot be achieved