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Fed's Attempt to Avoid Recession Tested by Yields Approaching 20-Year Highs

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Federal Reserve's Soft Landing Efforts at Risk as Yields Approach 20-Year Highs

The Federal Reserve's attempts to achieve a soft landing for the economy may be jeopardized as long-term interest rates reach their highest levels since 2007. The surge in 10-year Treasury yields, surpassing 4.7% in the past month, raises concerns about potential financial instability and increased borrowing costs for consumers and businesses. The rise in yields, which has not been resisted by Fed leadership, has the potential to slow economic growth and help contain inflation. However, the danger lies in the possibility that the increase in long-term rates could have a more damaging impact than anticipated. The recent collapse of Silicon Valley Bank following a rise in bond yields serves as a reminder of the potential disruptive effects. The rise in rates is occurring amidst other challenges, such as a resumption of student loan payments and an autoworkers' strike, which could further strain the economy. Market participants attribute the surge in yields to concerns about US budget deficits, reduced demand for Treasury securities from foreign investors, and expectations of Japan's exit from ultra-loose monetary policy. The conflicting signals from the Fed regarding its stance on real interest rates have also puzzled investors. The definition of real rates and the impact of inflation on future Fed policy remain unclear. As the rise in long-term rates continues, policymakers will need to closely monitor the situation to ensure it does not spiral out of control.

The Impact of Surging Interest Rates on New Businesses

The escalating interest rates in the US economy pose a considerable challenge, especially for new businesses. Startups often rely on loans for initial capital, and the steady rise in the yield on the 10-year Treasury note implies higher borrowing costs. This increased financial burden could potentially stifle the growth of new businesses and even threaten their survival.

Additional Economic Threats

Moreover, the economic landscape is fraught with other threats such as the resumption of student loan payments, higher gas prices, and potential government shutdown. These factors could lead to a decrease in consumer spending, which is often crucial for new businesses trying to establish a customer base.
Shifting Economic Narratives
The current economic volatility and shifting stance of the Federal Reserve on rate hikes add to the uncertainty. This environment may force new businesses to rethink their strategies, particularly those relying heavily on borrowed capital. The narrative shift towards fears of an economic downturn, as opposed to optimism for a soft landing, could make investors more cautious, potentially making it harder for new businesses to secure funding. Thus, the surging interest rates and associated economic challenges could significantly impact the trajectory of new businesses in the coming months.
Story First Published at: https://financialpost.com/pmn/business-pmn/feds-bid-to-avoid-recession-tested-by-yields-nearing-20-year-highs
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