October 2nd 2023.
Rewritten Text:
The U.S. bond market is heralding a new era – the age of low interest rates and inflation brought about by the 2008 financial crisis is over. What follows is uncertain.
Recent days have seen a dramatic rise in 10-year Treasury yields to 16-year highs, indicating a belief that disinflationary forces have abated. This is backed up by a regularly updated New York Fed model based on yields. According to this model, the U.S. economy is now in a ‘high-pressure equilibrium’ – characterised by inflation running higher than the Fed’s 2% target, low unemployment rates and positive growth.
Portfolio manager Greg Whiteley from DoubleLine expressed his thoughts on the shift in the outlook for rates: 'We have moved into a new era here. It’s not going to be a matter of struggling to get the inflation rate higher. It’s going to be working to keep it down.'
This shift has significant implications for policy, businesses and individuals. While savers are likely to benefit from the higher interest rates, households and businesses now accustomed to paying little to nothing for money may find themselves struggling to adjust. Furthermore, the Fed may have to raise rates to the point of breaking yet another economic system. Minneapolis Fed President Neel Kashkari wrote that if the economy was in a high-pressure equilibrium, the Fed would 'have to raise rates further, potentially going significantly higher to push inflation back down to our target.'
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