The yield on 10-year Treasuries is expected to be 2.6% by the end of this year and 4.1% in December 2014, according to Paul Kasriel, chief economist at Northern Trust.
He also expects other investment-grade bond yields to increase, which could help underfunded pension plans.
In a presentation to the Chicago Association for Business Economics on Tuesday, Mr. Kasriel said bond yields for U.S. Treasuries will rise if the federal government slows the growth in entitlement spending. If not, he warned, markets will begin to feel its effects and yields will decline “in a couple years.”
Mr. Kasriel said U.S. economic growth is expected to increase faster in 2012 than last year, but not enough to keep the Federal Reserve from considering another round of quantitative easing. The Fed will keep the federal funds rate near zero for now but will not maintain that through 2014, as it has forecast. Instead, he said, the central bank will begin raising rates in the second half of 2013.
Overall, Mr. Kasriel expects a 2.3% rise in the consumer price index this year and a 2.9% increase in 2013. He expects the unemployment rate to decline to 7.8% by December and 6.8% by December 2013.
“The 2012 economy will grow faster than in 2011 and even faster in 2013, whoever is elected president this year and regardless of any fiscal policy changes,” Mr. Kasriel said. “Changes in fiscal policy have no relationship to economic activity.”
Mr. Kasriel predicted that inflation in the U.S. would be 2.25% this year unless war breaks out with Iran and oil supplies from the Persian Gulf are curtailed. “The global economy will be back in recession if there's a war with Iran,” Mr. Kasriel said.
Mr. Kasriel is retiring as chief economist at Northern Trust effective at the end of April.