Last week, in line with broad expectations on the Street, Federal Reserve Chair Jerome Powell announced the unanimous decision by the FOMC to raise key interest rates by another 25 bps. With this move, the central bank has raised the benchmark borrowing cost to 5.25%-5.50%, ratcheting it up from nearly 0% in about 16 months.

With a 2.6% rise in inflation, down from a 4.1% rise in Q1 and well below the estimate for an increase of 3.2%, and an annualized increase of 2.4% in the gross domestic product in the second quarter, topping the 2% estimate, there is increasing belief in the Market that Jerome Powell and his team at the Federal Reserve may be on the cusp of achieving the elusive “soft landing.”

In Mr. Powell’s words, “The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.”

However, ECB raised interest rates by a quarter percentage point shortly after, citing persistent inflation. In such a scenario, despite increased optimism, businesses are expected to remain weighed down by high borrowing costs, and economic activity is expected to remain stifled due to relatively scarce credit.

Hence, there is still a significant probability that in order to overcompensate for the infamous “transitory” call that caused the Fed to arrive (really) late in its fight against demand-driven inflation, the central bank may be sowing the seeds of economic stagflation.

Moreover, with every increase in benchmark interest rates, a selloff of long-duration fixed-income instruments, such as the 10-year treasury notes, gets triggered, which causes a slump in their market value and a consequent increase in their yields. This also increases the benchmark 30-year mortgage rates, thereby depressing demand and deepening the crisis in which real estate has lately been finding itself.

After benchmark 10-year yields jumped by as much as 15 basis points above the key 4% level, Peter Schiff, CEO and chief economist at Euro Pacific Asset Management, warned of a crash in Treasuries. He has also predicted the benchmark 30-year mortgage rates to soon hit 8%, a level last seen in 2000.
Mr. Schiff’s apprehensions have also been echoed by David Rubenstein, co-founder of The Carlyle Group, who expressed his concern regarding the fate of commercial real estate as millions of people stay home and companies try to figure out what to do with empty offices.

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