Interest rates in the U.S. moved higher last week with the 10-year Treasury approaching 1.5%. The 15-basis-point rise in rates was driven by news that the Federal Reserve (Fed) would begin to taper its bond purchases in the coming months and that policymakers expected to increase interest rates sometime in 2022.
The removal of the monetary policies enacted to support the economy during the pandemic will have significant ramifications for markets across the globe. The impact of these changes will not be immediate, as removal of accommodation will be slow and likely occur over several years.
Given the amount of fiscal stimulus either enacted or contemplated in Washington, it will take significant time to move from today’s stimulative environment, which is promoting economic growth and employment while pushing up inflationary pressures, to a more neutral stance on policy. This week, Fed Chair Powell will speak to Congress about the Fed’s plans. At the same time, debate about fiscal spending on the bipartisan infrastructure bill and the Biden administration’s economic agenda of spending and tax increases is taking center stage in Washington.
The impact of these monetary and fiscal policies will be significant for many areas of the market and will lead to an increase in volatility in the coming months.
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