Behind that move is a bet that the disinflationary forces the Federal Reserve fought with its easy money policies in the aftermath of the financial crisis have abated, according to investors and a regularly updated New York Fed model based on yields.
This momentous shift in the outlook for rates has profound implications for policy, business and people. While higher interest rates are good news for savers, businesses and consumers have become used to paying nothing for money over the past 15 years. The adjustment to a higher-for-longer rate environment could be painful, manifesting in failed business models and unaffordable homes and cars.
This rise in term premium, which spent much of the last decade below zero, reflects high levels of uncertainty about economic outlook and monetary policy, investors said. Higher rates going forward would mean the Fed will have more room to adjust policy through tweaks in interest rates alone, with some investors believing that policymakers would retire quantitative easing as a policy tool. The Fed has been selling bonds that it bought, slowly shrinking its balance sheet.
While the market appears to be confident in its belief in the end of the era of zero interest rates, it is far less so about the economy’s actual likely path. The age of uncertainty has dawned among monetary policymakers, too. A San Francisco Fed study in August that developed an index to capture the level of disagreement among policymakers on their economic projections showed it had increased to above the average pre-pandemic levels by June.
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