Higher for longer? Rates could be higher forever
If borrowing costs remain elevated, there will be greater downside risk for investments. But it’s not all bad.
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OUR holiday from history has come to an end. I am referring not to world peace but to the zero-interest-rate environment so many people expected would last forever. Despite all the talk about when the US Federal Reserve will cut rates and bring back those holiday vibes, there is a very real possibility that it will not matter when the cuts happen or how many there are.
That’s because the interest rates that matter for much of the economy – longer-term US Treasury bills – may not just be higher for longer: They may be higher forever. And that would mean a new era not only for investing but also for the economy.
While the Fed exerts control over short-term Treasuries, the research is mixed on how much influence it has on longer-term bonds. And the 10-year is what matters for how capital is priced and what rates consumers face. Its price tends to be driven by macro factors: the growth and inflation outlook of the economy, global and domestic demand for safe US assets and, usually, the long-term debt of the federal government.
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