Reality Check

ECONOMIC SOOTHSAYERS are well known for their confident predictions on the course of interest rates. Now comes the latest consensus from the Blue Chip Financial Forecasts--a survey of 50 economists and financial institutions. According to this prognostication, interest rates on 30-year Treasury bonds will be about 7% during the spring of 1996. That's just slightly higher than current levels.

IN REALITY, predicting interest rates is much like shooting a gun out of a window and hoping a game bird flies by. Forecasters have missed all major interest-rate moves of the past three years, and long-term studies show no signs that economists do any better than chance. The reason? Long-term rates are set in financial markets, which are driven largely by investors' expectations. While economists are good at forecasting fundamentals such as gross domestic product and inflation, they can't track market psychology. With long-term rates, they assume tomorrow will be much like today.

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