The Rise in Long-Term Interest Rates: Good and Bad News

Another former Fed club member weighs in today on how/when/if the Fed unwinds the massive monetary stimulus it’s created over the past year. Frederic Mishkin, a former FOMC member, summarizes the problem and the potential in today’s Wall Street Journal, observing that there’s good news and bad news embedded in the recent rise in long-term interest rates:

“One cause of the rise in long-term rates is the more positive economic news of the past couple of months, particularly in financial markets. The bad news is that long-term interest rates are higher because of concerns about the deteriorating fiscal situation, with massive budget deficits expected for the indefinite future. To fund these budget deficits, the Treasury has to sell large quantities of bonds both now and in the future, causing bond prices to fall and interest rates to rise.”

Speaking of expectations, what’s the market thinking? Based on the previous close of Fed funds futures on CBOT, traders think the central bank will begin tightening the screws ever so slightly in the second half of the year, as per the chart below. To be sure, there’s still no inflation on the radar screen and it’s not yet clear the economy has stopped contracting. But markets have a tendency to look forward. That doesn’t make them right, but it doesn’t stop them from considering the full range of possibilities and placing odds on what appears to be the most likely outcome.

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

Be the first to comment

Leave a Reply

Your email address will not be published.