Interest Rates: A Quick Update
As requested by David Beckworth, this is an update of my analysis on June 26. The red section of the graph indicates the new data since the original analysis. Wow. We live in interesting times.
For unfamiliar readers, I should note that the 10-year yield, as well as the yield curve across maturities, is about flat since June 26, but equity prices have recovered to levels seen prior to the jump in yields.
The marginal daily datapoint continues to indicate that rising rates are less a sign of an improving economy as opposed to a tighter monetary policy than 90 days ago, at the beginning of the sample interval. The last few weeks' worth of of data appears to be strongly negative in terms of the rate-equity association. We're about to cross zero any day now -- which roughly means that, over the past 90 days, monetary tightening has been as important to rates as has been macroeconomic strengthening. Since the tightening isn't 90 days old, that's pretty striking.
I've re-posted below a comment I just left on Scott Sumner's blog. It explains how I'm thinking about the market response to ongoing developments in forward guidance and clarification of the monetary-policy exit strategy.
I would have said with very high confidence that the major cause of the rise in Treasury yields was a change in future monetary policy. I think the last week forces me to revise down that confidence, even if it is still high. My sense is that the Fed has clarified one thing, and the market’s mind has changed on another: (1) the Fed will be conditional, and markets feared at first it wouldn’t, and conditionality improves the mean forecast by containing downside risks, (2) the market may have reassessed the sensitivity of NGDP growth to interest rate changes (or monetary policy changes) in the relevant range. I find (1) and (2) a much more persuasive story of why rates could stay high and equity prices could revive than anything else out there.As always, please leave a comment or send me an email if you have a better explanation or can poke a hole in mine.
I’m still openminded on these questions. I don’t see myself as advocating for a particular point of view. I just saw a lot of writers who I respect getting way too cavalier last month about the changes in expected future interest rates. I’m excited for monetary policy to normalize — but, like you, I don’t see the super strong evidence (as much as I’d like to!) that the economy is suddenly stronger.As always, please leave a comment or send me an email if you have a better explanation or can poke a hole in mine.
Note: It appears that my red line begins a little late, if you look at the original post.