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.
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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