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14 8 Another reason is that monetary policy has been very easy for a very long time. Short-term policy interest rates have been close to zero for most of the last 13 years. Since shortly after the pandemic began, quantitative easing has been on steroids. In addition, unprecedented federal fiscal stimulus dramatically expanded the size of the national debt. That makes it more difficult politically for the Federal Reserve to tighten monetary policy because higher interest rates increase the federal government's debt service costs. Finally, we believe the Federal Reserve will continue to prioritize achieving and maintaining full employment above containing inflation. These considerations increase the chances that we will see sustained inflation well above the Federal Reserve's desired average rate of 2 percent. Several long-term trends that were keeping a lid on inflation prior to the pandemic have reversed. For example, the recent retreat from globalization, including the trade war as well as proposals for protectionist trade and industrial policies, boost the prospects for inflation. The strong dollar has helped to keep inflation at bay, but that will change in the near future. We expect the Federal Reserve to slowly pivot away from its very stimulative monetary policy stance towards a neutral stance in 2022 and a restrictive stance in 2023. The initial move will be to slow the increase in the size of the Federal Reserve's balance sheet by reducing its monthly purchases of $80 billion in treasuries and $40 billion in mortgage-backed securities. These net purchases--referred to as quantitative easing—are expected to end by mid-2022. We think the Federal Reserve will keep short-term policy interest rates between 0 and 0.25 percent through most, if not all, of 2022, and begin to increase them in either the final quarter of 2022 or the first quarter of 2023. If so, monetary policy will become neutral in 2022 and slightly restrictive in 2023. But the inflation risks are not evenly balanced: the risks of higher than desired inflation outweigh the risks that inflation will be lower than desired. So there is some concern that the Fed may raise its targeted rate from 2 percent to 3 percent in 2022, which could un-moor expectations for future inflation. Interest Rates The first hike in the federal funds rate will occur in either late 2022 or early 2023. The yield on the 10-year treasury is currently too low given the prospects for U.S. GDP growth and inflation. We expect the yield on the 10-year note will to move higher throughout 2022, ending the year at about 2.5 percent. The 30-year fixed rate mortgage will rise to 3.75 percent at the end of 2022, up from about 3 percent in 2020-21. If the Federal Reserve is successful at holding inflation to an average annual rate of about 2 percent and the long- term growth rate of real U.S. GDP is about 1.75 percent, then the yield on the 10-year treasury should rise to about 3.75 percent within the next 3-5 years. If we are correct and inflation averages about 3 percent instead of 2 percent, then the yield on the 10-year treasury will rise to about 4.75 percent over the next 3-5 years. (This forecast is based on an assumption that over time the yield on the ten-year note tends to roughly match nominal U.S. GDP growth.) Crude Oil Markets The basis of our forecast for crude oil prices is that the recovery in global oil consumption will be balanced by increases in production. Absent significant supply interruptions, or additional price premiums due to political tensions, it follows that oil prices will be relatively stable in 2022. Prices are expected to trade close to the long-term equilibrium level of about $60 per barrel, or slightly higher than the break-even price for new U.S. shale oil wells of about $55 per barrel. Although U.S. demand for oil fully recovered in 2021, oil production will take longer to recover. In 2022, global demand for oil is expected to increase as mobility increases across more countries. OPEC+ decisions to boost production are expected to roughly match increases in global demand, but non-OPEC+ oil production will increase only slightly, thus giving OPEC+ more power to set prices than was the case before the Covid recession. Of course, a significant supply interruption could force oil to trade significantly higher. As always, there is no shortage of potential negative supply shocks. The downside risk for the oil price

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