A hawkish US Fed and heavy debt supply raise the rates bar
Explore how the Federal Reserve’s policies and geopolitical tensions are shaping the economy, impacting interest rates and market vulnerabilities.
We’re raising our interest rate forecasts in the October baseline to reflect a more hawkish Federal Reserve, a higher neutral rate, and elevated inflation risks. We think the impact of higher rates on the economy is being offset by the strength of the AI buildout, but this raises the probability of downside risks to the economy. The stock market, private credit, and small business are the three key vulnerabilities to track.
Along with a hawkish Fed, we expect longer-term pressure on long-end yields to be exacerbated by geopolitical uncertainty, supply pressures from growing sovereign and AI-led corporate debt issuance, a shifting base of Treasury buyers, and signs of weaker demand at Treasury auctions.
Risks to the outlook for bond yields are particularly sensitive to the energy-price outlook. Persistent oil shocks or weaker Treasury demand could push yields higher, while faster oil-price declines or an AI-led market correction could bring yields down sooner.
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