Anyone hoping for cheaper borrowing this year is being given a sobering message. With Brent crude trading around $110 a barrel and long-dated US government bonds paying more than 5 percent, the world’s major central banks are signalling that higher for longer interest rates are the new normal, and a few are openly weighing further increases.
The Fed holds its fire, for now
The US Federal Reserve meets on October 28. It raised its benchmark rate to a range of 3.75 to 4 percent last month, its first increase in more than three years, and Chair Kevin Warsh has repeated his commitment to returning inflation to 2 percent.
Futures markets do not expect another move next week. Pricing on prediction platforms and in the CME’s FedWatch tool points to roughly an 85 to 88 percent chance of a hold. December is a different matter. Traders put the odds of a further quarter-point increase at about 76 percent on some measures and close to 90 percent on others.
In short, the Fed is expected to pause before moving again.
Bonds are already doing the tightening
The bond market is not waiting for the central bank. The 10-year Treasury yield sat near 5.1 percent this week, the two-year near 4.8 percent and the 30-year above 5.4 percent. Those yields set the cost of mortgages, car loans and corporate borrowing, whatever the Fed does with its own rate.
The housing market has felt it. US pending home sales fell 7.3 percent in September, far worse than economists expected. The Mortgage Bankers Association says the average 30-year fixed rate was 7.41 percent last week, slightly below the 7.5 percent of the week before but still punishing for buyers.
Oil is the common thread
What links these moves is energy. Brent rose about 2 percent on Thursday to roughly $111 a barrel. Markets have swung on conflicting reports about US–Iran negotiations and on attacks on shipping in the Persian Gulf. A flicker of optimism about a deal pushed US crude below $98 earlier in the week, but the relief did not last.
Carl Tannenbaum, chief economist at Northern Trust, told an Australian business programme that “higher for longer” is a fair description of what lies ahead. In his view, price pressure is spreading from petroleum through diesel into the cost of many everyday goods, and the conflict in the Middle East may run on longer than markets hope.
Pressure beyond Washington
The picture is similar elsewhere. UK inflation unexpectedly accelerated to 3.5 percent in September, according to figures published this week, which firmed expectations of tighter policy from the Bank of England.
In Australia, Reserve Bank deputy governor Andrew Hauser said the inflation outlook is “materially worse” than the central bank forecast and that high inflation is becoming entrenched. Economists describe a rate rise at the RBA’s early-November meeting as a live possibility.
What it means for savers, borrowers and investors
For borrowers, the message is to plan on current rates lasting rather than waiting for a drop. Households with variable-rate debt or loans coming up for renewal are the most exposed.
Savers get a modest consolation: deposit and money-market returns are likely to stay elevated. Investors face a more awkward trade-off. Gold, usually a haven in uncertain times, slipped about 1.3 percent to near $4,090 an ounce on Thursday as the prospect of more rate rises made non-yielding assets less attractive.
What to watch next
Three things will shape the next few weeks. The first is the Fed’s tone on October 28, in particular any hint that December is already decided. The second is the oil price, which hinges on whether diplomatic efforts in the Gulf produce a deal or the shipping attacks continue. The third is whether the next round of inflation data shows energy costs leaking into core prices, the category central bankers worry about most.
Until one of those shifts, the bond market’s message is the same as the central banks’: borrowing is going to stay expensive.
