With the resolution of the debt-ceiling crisis and an appreciable moderation of inflation from its decades-high levels around this time last year, an exuberant market was optimistic about a much-coveted “soft-landing” and seemed to have priced in a pause in interest rate hikes by the Federal Reserve.

Moreover, with Artificial Intelligence emerging as the next big thing, the optimistic outlook for semiconductor and technology stocks kept sentiments buoyant on Wall Street.

After ten interest-rate hikes in about a year to take the Fed funds rate to a target range of 5% to 5.25%, Jerome Powell and the FOMC announced a much-awaited pause. However, this came with a projection (and caveat) of two additional quarter-percentage point hikes before the end of the year as the Central Bank remains determined to bring inflation down to its target of 2%.

While the labor market has remained persistently tight amid an economic resilience that has largely exceeded expectations, signs of softness have begun to emerge as increased borrowing costs have kept the demand in check and hurt supplies by making growth more expensive to finance.
Secondly, rising interest rates have made servicing debt expensive not just for individuals and businesses but for sovereign nations as well. Back-to-back global crises have aggravated public debt burdens accrued by developing nations in recent years and have triggered Ghana, Chad, Ethiopia, and Zambia to seek debt treatment under the Common Framework.

With the Bank of England outpacing its peers with half percentage point interest-rate hike and Turkish Central Bank also getting in on the act in a departure from its earlier policy, the ‘hawkish pause’ by the Federal Reserve has increased misgivings that the central banks might overcook it with rate hikes.

Such fears had already materialized earlier this year with the recent bank failures on both sides of the Atlantic when banks across the board suffered steep markdowns of their long-dated bonds and loans while holding on to deposits became more expensive.
Treasury Secretary Janet Yellen also echoed these concerns on the sidelines of a conference in Paris, “I’m not going to say it’s not a risk, because the Fed is tightening policy.”

With the latest data also suggesting that central-bank rate hikes are causing a global economic cooldown, investors are understandably spooked and seeking safety in fixed-income instruments and precious metals.

With the 10-Year Treasury note yield hovering around 3.5% after recently topping 4% for the first time since 2008, it’s not difficult to understand investors’ rekindled love for bonds.

Also, gold has emerged stronger than…

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