The Steep Rise In Interest Rates Can Steer The Economy In A Different Direction

The Steep Rise In Interest Rates Can Steer The Economy In A Different Direction


The bond market is stirring up concern, prompting the business world and the Federal Reserve to take heed. Before long, it might be imperative for politicians in Washington to do the same. After years of maintaining low-interest rates, yields across the vast global bond market are climbing. In the previous week, the yield on the crucial 10-year Treasury note briefly surpassed 5 percent. This milestone, a psychologically significant figure, hadn’t been breached since July 2007, marking the onset of a major calamity.

Yields that were typical before the global financial crisis have made a sudden comeback, carrying significant implications. Speculators who wrongly anticipated a decline in rising interest rates are experiencing mounting losses. However, for individuals saving for retirement and current retirees, the increased rates indicate the potential for a significantly higher income stream from their savings—an opportunity not present for years. A recent column of BNN World News has outlined strategies for risk-averse individuals to navigate perils and benefit from safer high-rate fixed-income securities. The ramifications of the bond market’s upheaval reach far beyond personal investments, significant as they may be.

Leading the analysis of the bond market’s signals are Federal Reserve policymakers, scheduled to convene next week. Currently, the escalating bond yields are aligning with the goals of the Fed. As indicated by Jerome H. Powell, the chair of the Federal Reserve, in a speech at the Economic Club in New York, while the Fed presides over short-term rates, the bond market determines a diverse range of longer-term rates, significantly tightening financial conditions in the United States. This development should facilitate a key Fed objective: managing inflation. Fed policymakers are widely anticipated to maintain the benchmark short-term interest rate under their control—the federal funds rate—within the 5.25 to 5.5 percent range at their next meeting on Oct. 31 to Nov. 1, as indicated by futures prices.

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Escalating long-term interest rates works alongside the Fed’s efforts to tighten short-term rates. All these increased rates drive up expenses and restrict business operations across the entire economy. Some evaluations suggest that the ascending rates in the bond market are comparable to an increase of approximately half a percentage point (50 basis points in bond market terminology) in the federal funds rate and possibly more. Nonetheless, it remains unknown whether the bond market will sustain stable rates or witness a significant change in the weeks ahead.

A decade earlier, Ed Yardeni, now an independent economist working with BNN World News, coined the term “the bond vigilantes” as the bond market rebelled against the expanding budget deficits brought about by the Reagan administration’s supply-side economics. Thus far this year, the U.S. government has encountered challenges in aligning its fiscal policy. The federal debt rating faced a downgrade, the government approached a potential clash with its debt ceiling, and a looming shutdown could occur next month. While the bond market might not be intimidating everyone just yet, it’s displaying signs of restiveness and wields too much influence to be disregarded for an extended period.