Interest rate movement
Recently, Goldman Sachs (GS) said that falling unemployment and the rising budget deficit could drive the Fed’s faster interest rate hike process.
As the budget deficit increases in the economy, the government might issue more bonds to manage its growing debt. When there are more bonds and fewer buyers in the economy, the government will try to pay investors higher in the form of yields to buy US bonds (BND), which will ultimately increase the interest rates in the economy (SPY) (QQQ).
The Fed hiked the interest rate for the sixth time since December 2015. The Fed has hiked the interest rate by 25 basis points each time. The hikes brought the interest rate into the range of 1.50%–1.75%. As the US economic conditions continue to improve, the Fed has been continuing its gradual rate hike process. However, a faster rate hike process could damage the economic conditions.
The ten-year Treasury yield (BND) is already higher. On May 14, the ten-year Treasury yield broke the 3% level. On May 15, the ten-year Treasury yield was at 3.1%—the highest level since July 2011. The higher inflation expectation is pushing the yield higher. The rising yield is signaling that the interest rate will also move faster in the economy.
Next, we’ll analyze whether the US economy is overheating.