It takes time to slough off the bad habits that have become entrenched over years, so it’s no surprise that investors have struggled to believe that the US central bank won’t revert to its old trick ofAnd it’s even harder for investors to accept that the post-financial crisis era of ultra-low interest rates is finally coming to an end.But the latest spike in US bond yields suggests that investors are now slowly, and very reluctantly, coming to terms with this new reality.
More than 80 per cent of investors expect the US central bank to hike rates by 75 basis points, which would leave the Fed’s new target range for interest rates at between 3 per cent to 3.25 per cent, and the rest expect the Fed will hike by a full percentage point. The problem is that this approach would further fuel inflationary pressures, which would cause investors to dump bonds, pushing long-term yields even higher. And that, in turn, would cause economic activity to slow, and trigger a drop in prices for risk assets.
That’s because, even after this year’s rapid-fire rate hikes, US monetary policy is still far from restrictive, given thatThey point out that, in real terms – after adjusting for inflation – the Fed’s target rate is still far from inhibitive. Indeed, real US official interest rates remain lower in real terms than at any time from 1954 to 2021.Anatole Kaletsky: A US recession is not remotely plausible within the next six months or so.