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US Yield Surge Aids Fed In Fighting Inflation, But Could Mean Harder Landing

Celebrating Economic Resilience on Labor Day: Effective Inflation Control Amid Pandemic Challenges. (Photo: Google)

The rising cost of borrowing threatens the property market’s fledgling recovery and makes it more difficult for businesses to secure investment capital. Additionally, it has caused US stocks to tremble, reducing some of the wealth gains that investors have thus far this year.

Soft Landing On Threat

The increase in rates—10-year Treasury yields have increased by more than a percentage point since mid-May—is one of several shocks shaking the US economy, which has been surprisingly resilient. The government is about to shut down, auto workers are on strike, and after a long hiatus, student loan payments are starting up again. Oil prices are rising, European economy is sluggish.

Diane Swonk, the head of economics at KPMG LLP, said: “It’s turning into a string of unfortunate events.” “The soft landing is under threat.”

Swonk anticipates that the US will avoid a recessionary hard landing, but she projects that the expansion rate will decline significantly in the fourth quarter, from about 4% in the current quarter to 1% annualized, with negative risks to that projection.

However, the increase in yields may not be a big issue for Federal Reserve policymakers and may even be beneficial. Bond market movement has not been followed by an increase in inflation expectations, which would have the potential to solidify excessive price increases.

That suggests the action may help cool down an economy that Fed policymakers had feared was getting out of control. The central bank sent a more hawkish message than many investors anticipated last week while maintaining the same interest rates, which is why yields have recently increased.

According to Lou Crandall, chief economist of Wrightson ICAP LLC, “there’s even less need for the Fed to tighten further if bond yields are moving higher.”

Tolerance Decreases


PHOTO: ETF Database

For the second consecutive month, consumer confidence declined, and several poll participants in the Conference Board study expressed concern about rising rates.

According to Mark Zandi, chief economist of Moody’s Analytics, there isn’t much more the economy can withstand without running the risk of entering a recession.

I believe the economy can handle 10-year Treasury yields of 4.5%, but anything above 5% for an extended period of time will be difficult to bear, he added.

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