Yesterday’s stock market rout has been at least partly attributed to rising interest rates. With bond yields up, investors who were once pushed into the stock market by the likes of Ben Bernanke and Janet Yellen are finally getting some well deserved respite under Chairman Powell.
The President isn’t happy about rising interest rates, blaming the Fed for the sell-off, but he should be. Many of his retired and soon to be retired supporters are in favor of higher interest rates. A little air coming out of the stock market isn’t a bad thing. Stock prices have been distorted for years by ultra-loose monetary policy from the world’s central banks. Candidate Trump knew this when he called out former Fed Chair Janet Yellen for inflating the stock market.
Instead of blaming the Fed for raising interest rates, he should embrace the long overdue normalization of rates. Because as the NY Times explains here, interest rates are rising for all of the right reasons.
The cost to borrow money is on the rise. That is bad news for home buyers and other prospective borrowers. It helped cause a stock market sell-off on Wednesday, and prompted President Trump to say that the Federal Reserve has “gone crazy.”
But it amounts to good news for the long-term direction of the economy.
In effect, the multi-trillion dollar global bond market is signaling a little greater confidence than it did just a few weeks ago that the nine-year expansion in the United States may have room to keep going for years to come, and without inflation taking off.
The yield on 10-year United States Treasury bonds reached a seven-year high this week of 3.25 percent (it receded some Wednesday as stocks dropped), up from 2.82 percent in August. The 10-year rate was below 1.4 percent as recently as July 2016.
But beyond those headline numbers, the details of how the prices of different types of securities have moved relative to one another tell a story that is decidedly optimistic.
Read more here.
Jeremy Jones, CFA
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