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Inspecting Interest Rates

January 28, 2022

In January the 10-year government bond yield shot up — what does that mean for interest rates, and the overall economy? Catch our newest TrendsTalk episode with ITR CEO and Chief Economist Brian Beaulieu to learn more.

 

 

 

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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.


Hello. Welcome to this edition of TrendsTalk, and I'm Brian Beaulieu, CEO, Chief Economist of ITR Economics.

I want to talk about interest rates briefly. January we've seen the long bond, the 10-year government bond yield, really shoot up, more than normal, clearly. But for all of that, when we tore it apart, looked at it, it's come back to where it was in 2019, so that's the first takeaway. We're not looking at any flash warning sign by the marketplace, pushing up these long-term interest rates. It's normalized to pre-COVID, and we don't think it's stopping there. We think it's going to continue to go up because the world that we live in today is not like the pre-COVID world. There's so much more deficit spending, so much more inflationary pressures. We think the bond market's actually being very quiescent about things.

Federal Reserve has said they're going to be pushing up interest rates three times over the course of 2022. We suspect that means anywhere from 75 to 150 basis point rise. Even with that, we don't see any threat of an inverse yield curve developing. We're still looking at a very favorable yield curve throughout 2022, so what that means is that even though interest rates are up, and we have interest rates running, long bond, running above 2% throughout 2022, more than 2.1, 2.2%, it's not going to be enough to slow down the economy. It's not going to be looking at an inverse yield curve. It's not enough to hurt the housing market either. Our research shows you need about a three full percentage point swing in interest rates before you start seeing damage happen to the economy. The consumers start to behave in other ways.

We're not there yet. We don't think we're going to be there for '22, '23 and even '24. We'll know when we get there and we'll let you know, but for now, higher interest rates, yes, but breathe. It's okay. It's normal. It's part of the business cycle. We got this.

Thank you for listening to this edition of TrendsTalk. I'm Brian Beaulieu.

About

Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.