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CBO economist exposes an LTCI enemy

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The Federal Reserve Board has a huge influence over short-term interest rates, but the Fed, and many economists, say the bond market itself still has the most influence over long-term rates.

Borrowers like low interest rates. Life insurers, which have huge pools of assets to invest, and many long-term annuity, long-term disability (LTD) insurance and long-term care insurance (LTCI) obligations to meet, tend to hate low rates. Low rates hurt their portfolio yields.

So, why are rates so very, very low?

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Wendy Edelberg, an economist at the Congressional Budget Office (CBO), gave a presentation on some of the factors influencing long-term interest rates Monday in Washington, at a meeting of the Social Security Trustees Working Group.

She told that some of the factors pushing rates up relative to the average prevailing from 1990 to 2007 include a decrease in investment from abroad as a share of output, an increase in federal borrowing, and a “decrease in [the] private savings rate because of an aging population,” according to a written version of her presentation posted on the CBO website.

Factors pushing rates down relative to the 1990-2007 average include a lower rate of inflation, slower labor force growth, lower productivity growth, an increase in demand for safer assets — and an “increase in private saving because of greater income inequality,” Edelberg said.