With a backdrop of soaring interest rates, a strong dollar, and climbing oil prices, experts are predicting a less optimistic future for the U.S. economy, as highlighted by economist Mohamed El-Erian on Thursday.
The President of Queens’ College, Cambridge, and chief economic adviser at Allianz, wrote in the Financial Times that the current economic circumstances stifle growth and amplify the risk of entering stagflation, a scenario characterized by low or no growth coupled with persistent inflation.
The outlook on the U.S. economy has been adjusted for the sixth time in the last 15 months, El-Erian noted.
According to the economist, this alteration is anticipated to last longer, potentially unsettling the previously sturdy U.S. economy, shaking financial stability, and exporting volatility on a global scale.
Over a mere two weeks, the yield on the benchmark U.S. 10-year bond has surged by 0.5 percentage points to approximately 4.8%, contributing to an overall increase of one percentage point since the end of June. Concurrently, Treasury-linked exchange traded funds have tumbled. The iShares 20+ Year Treasury Bond ETF TLT has fallen 16% year to date, and more than 50% since its 2020 highs.
This rapid escalation has ushered in higher borrowing costs for corporations, exacerbated household car loan obligations, and generated an uneven pattern of deposit outflows from the banking system.
Remarkably, the cost of a 30-year mortgage is on the brink of reaching 8%, intensifying the challenges associated with home acquisitions.
Driving this surge in yields is a combination of market recognition of the probable continuation of higher Federal Reserve policy rates and the imperative need to absorb a substantial supply of Treasury bonds due to burgeoning budget deficits, El-Erian points out
Simultaneously, elevated oil prices, sustained production cuts by OPEC+, and critically depleted inventories pose a substantial risk of broader inflationary pressures, he adds in his FT op-ed.
The financial sector faces challenges related to stability, including disparities in interest rate profiles within banks and the potential for credit market dislocations.
While financial markets adapt nimbly to the realities of higher rates, the real economy is in a comparatively nascent phase of adaptation, pointing toward a challenging path forward.
“Given also what is happening to other drivers of economic growth, here is why I worry that both the nature and magnitude of the recent surge in yields will make it harder for the US to avoid a recession in 2024,” El-Erian tweeted on the social media platform X.
Photo: International Monetary Fund on Flickr
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