Strong Economy Faces Rising Interest Rates Headwind
The US economy continues to show broad momentum with business activity, investment, and labor market conditions remaining resilient. The Atlanta Fed's GDP Now estimate for third-quarter real economic growth remains at an elevated 5 percent.
Rising inflation pressures and higher debt levels are pushing interest rates higher, creating headwinds for future economic activity. The S&P Global Purchasing Managers' Index (PMI) showed a surge in both services and manufacturing activity, but also highlighted price pressures amid supply chain delays and rising input costs.
Higher interest rates are not just a US phenomenon; they're moving higher across much of the developed world. The real cost of debt is pushing further above the real potential growth generated by that borrowing, with the current real yield exceeding the estimated real intermediate- to long-term potential growth rate of the US economy.
Despite the consternation surrounding rising interest rates, bonds offer more attractive entry points today than at any time in nearly 20 years, assuming the Federal Reserve keeps inflation in check.