Interest-Rate Pain From Higher Inflation Has Barely Begun
Inflation hurts for many reasons, but one of the most important is that it usually means higher interest rates. Yet in the past year, while inflation has jumped 7 percentage points, the Fed’s short-term interest-rate target has gone up just 1.5 points and the 10-year Treasury note yield just 1.9 points.
The gap reflects a belief by investors that in a few years, inflation will relatively painlessly slide back to around 2%, the Federal Reserve’s target, allowing rates to return to the ultralow levels that prevailed before the Covid-19 pandemic. What if instead inflation remains stubborn and rates have to rise a lot more? That would spell trouble for an economy where asset values, private and public debt have risen on the assumption that rates will remain historically low.
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