Are Investors Ready for Higher Interest Rates?
If the economy keeps growing, it hastens the day when the Federal Reserve ends the era of 0% interest rates
Data showing the U.S. economy is growing again has renewed the debate about where interest rates are headed—a question with big implications for both the economy and investors.
The U.S. gross domestic product report released Oct. 29 showed that the economy grew by 3.5% last quarter, a higher percentage than many were expecting, and fixed-income markets took it as a sign that a rate increase will happen sooner. Treasury prices fell after the release of the GDP figure, and the yield on 10-year U.S. Treasuries rose 0.08 points to 3.5%.
That’s still a historically low rate, reflecting the fact that the Federal Reserve is holding the short-term federal funds rate near zero in order to stimulate the economy. It’s the reason why yields on bank savings and money market accounts are so paltry.
Such low rates aren’t sustainable for long periods of time out of fear, among other things, that low rates can overheat the economy, spark inflation, or drastically devalue the U.S. dollar. “At some point the Fed needs to be thinking about tightening monetary policy,” says Villanova School of Business economics professor Victor Li. […]