Markets – stocks and bonds alike – seem singularly focused on one factor in recent weeks – interest rates. The business news channels have the 10-year interest rate ticker in the corner of the screen, watching it near a 5% level all week (which it crossed late Thursday night). As rates continue to rise, both stocks and bonds have been under pressure.
This week has been relatively quiet on the economic news front, replaced with well-placed concern regarding geopolitical events and attention being given to the quarterly earnings cycle. However on Thursday, interest rates came back into focus as Federal Reserve Chairman Jerome Powell spoke as Economic Club of New York.
During his remarks, Powell kept his messaging relatively consistent with the last Fed meeting when they announced a pause in rate hikes. Powell noted how strong the economy remains (perhaps surprisingly as many had predicted a recession this year and instead we have above normal growth). This strength was evidenced again this week by lower than expected jobless claims and higher than anticipated retail sales.
Powell talked at length about potential lag effects of rate increases and noted that some parts of the economy are currently rather immune to the rate increases (such as the large percentage of home owners that refinanced their mortgages during the pandemic years – who now have low fixed rates and higher real wages). The impact of rate hikes can’t (and won’t) impact everyone at the same time or in the same manner.
Despite those lags, Powell reiterated the confidence he has in monetary policy’s ability to result in stable employment and stable prices over time and noted progress made on both fronts this year.
As to the path forward (with two meetings left this year), Chair Powell “stuck to the script” saying the Fed would remain data dependent, including paying close attention to the recent movements in yields. “Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,”
Separate from the Fed’s path forward (which controls the front end of the curve), there are ongoing increases for rates on longer-dated bonds as well. For instance, the 10-year Treasury yield has now risen nearly 1 percentage point since July (the date of the last Fed hike) which is a very unusual rate of change. The 10 year is very near to 5% as of this post, a new 16-year high.
We’ve written about these increases in recent weeks and the message remains the same – these increases are predominantly being caused by a few main factors: higher supply (due to fiscal policy/higher deficits), higher rates in other countries, and a belief that short rates will stay “higher for longer.”
As always, the future is uncertain. But one thing seems clear – interest rates will be in focus for the foeseeable future.
Onward we go,
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