Oct 132018
 

President Trumps tax reform helping increase interest rates. That must be the conclusion when one realizes that the economy is of all cylinders and about to go into overdrive. When the U.S. economy fires on all cylinders the eventual result is an overheating of the economic engine, and the subsequent increase in inflation, followed by the Federal Reserve increasing interest rates to cool the engine back down. This has been a formula that has happened over and over again, going back decades. And with that 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 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 up from 2.82 percent in August. The 10 year rate was below 1.4 percent as recently as July 2016.  Looks like tax reform helping increase interest rates is what is actually happening.

“The long end of the yield curve has finally moved to the view that this could be a more persistent recovery,” said Michelle Meyer, had of U.S. economics at Bank of America-Merrill Lynch. “It’s reflecting the possibility that this recovery has further legs.” But, crucially, the higher long term interest rates don’t seem to be driven by expectations that inflation will soar higher.  The yields of inflation protected bonds have moved mostly in lock step with traditional bonds in recent weeks, suggesting that traders haven’t become more worried about inflation.


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