Decades of falling rates give way to higher borrowing costs and new math for investments
The shift has rocked financial markets, driving mortgage rates to their highest level in nearly 14 years, sending bonds into their steepest plunge ever and tanking speculative investments such as technology stocks and bitcoin, a cryptocurrency.adjusts, more tumult lies ahead. Consumers, already feeling the pinch of higher prices, will pay more for credit card balances and auto loans. The least creditworthy companies will struggle to raise money needed to hire and expand.
But that estimate assumes that the government will pay 2.1 percent to borrow money from long-term bond investors. If instead the yield on the 10-year Treasury security this year averages its current 3.25 percent figure, taxpayers would pay an additional $32 billion in interest, according to the nonpartisan Committee for a Responsible Federal Budget.
Over the past seven decades, the Fed’s benchmark lending rate has traced an extraordinary arc. From about 1 percent in the mid-1950s, the Fed funds rate reached a peak of 20 percent in 1980, before beginning a four-decade slide to the ultralow borrowing costs of the past decade. loans; novel investment structures designed to evade regulatory scrutiny; and trendy stocks that rode a wave of public enthusiasm before crashing against financial reality.Advertisement
, a flagging video game retailer, and drove them to $347 from $17. Since then, the stock has dropped 60 percent.“There was a lot of froth that needed to come out of the markets as a consequence of ultralow rates, which distort the allocation of capital,” said Neil Shearing, chief economist for Capital Economics in London.
The Fed’s latest projections call for its key lending rate, which was near zero as recently as March, to rise to 3.4 percent by the end of this year and 3.8 percent by the end of 2023, which would be the highest levels since 2008.
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