The sharp bond market selloff is starting to pinch American consumers and companies, causing a mild economic tightening that, if sustained, could raise alarms at the Federal Reserve and even delay a plan to hike interest rates in coming months.
U.S. mortgage rates have reached their highest level in a year-and-a-half, auto loans are getting a bit more expensive, and corporations across the board have seen their borrowing costs jump as U.S. and European debt retrenched in recent weeks.
With benchmark U.S. government debt having jumped from 2.13 percent to as high as 2.49 percent so far this month, Fed officials headed into a policy meeting next week will be asking how long the selloff could last — and how much it could slow the economic rebound from a winter slump.
“It’s got to be part of their calculus. And I do think that they will try to micro-manage the market,” said Craig Dismuke, chief economic strategist at Memphis-based broker dealer Vining Sparks.
After 6.5 years of ultra easy monetary policy, Fed officials would welcome at least some evidence of tightening financial conditions as they increasingly telegraph a rate hike.
The concern is a repetition of 2013, when then-Fed Chairman Ben Bernanke set off a market rout that threatened the recovery when he suggested a stimulative bond-buying program could soon be curbed.
Investors and economists said that while the recent market move is on the Fed’s radar, given its volatility, alarm would grow if the 10-year U.S. Treasury yield were to soon rise above 2.75 percent.
Such a tightening could imperil the all-important housing market, as it did during the so-called “taper tantrum” two years ago, which prompted a flurry of dovish speeches by Fed officials attempting to control the damage.
At the time, stock markets plunged and mortgage rates shot up to 4.8 percent, spooking home buyers. While today’s economy does not face that sort of trouble, there are warning signs.