TERM-STRUCTURE FORECASTS OF INTEREST-RATES, INFLATION, AND REAL RETURNS

The one-year expected inflation rate and the expected real return on one-year bonds move opposite one another. The result is that the term structure shows little power to forecast near-term changes in the one-year interest rate, even though it shows power to forecast its components. When the forecast horizon is extended, interest-rate predictions improve because they primarily reflect changes in expected inflation that are less strongly offset by changes in the expected real return. The information is the term structure about interest rates, inflation and real returns is related to the business cycle. © 1990.