The normal cyclical rise in interest rates, which was delayed due to the financial crisis and recession and by Federal Reserve actions to hold down bond yields, is now emerging, according to BNY Mellon Chief Economist Richard Hoey as outlined in his most recent Economic Update.
"We believe that a persistent multi-year upward drift in interest rates is now likely," said Hoey. "The aftermath of the three-decade-long decline in interest rates is likely to be labeled a secular bond bear market, but we prefer to view it in the context of the cyclical normalization of interest rates that we expect over a half-decade period."
"If we are correct to expect real GDP growth of 3% or more for the next three years, 10-year Treasury bond yields are likely to eventually normalize at about 5% at the end of a half-decade-long process of interest rate normalization," Hoey continued.
Hoey states that the economic impact of an interest rate rise is very sensitive to the cyclical stage of monetary policy and outlines what he thinks are five stages of monetary policy:
- Aggressively stimulative
- Aggressively restrictive.
"The Federal Reserve plans a gradual move from aggressively stimulative to merely simulative, in response to evidence that the U.S. economy is in a sustainable economic expansion," Hoey concludes.
Click this link for Hoey's complete June 2013 Economic Update.