End of Easy Fed Money Points Toward Potential for Inflation

Since 2008 the Federal Reserve has maintained an easy money fiscal policy that has been responsible, in part, for the steady rise of the stock market as well as fostering an environment of historically low interest rates.

Recent yields on Treasury bonds, however, indicate that the era of quantitative easing may be over, resulting in upward pressure on rates and, with, the of risk of inflation.

Since January, the yield on the bellwether Treasury 10-year note has been climbing steadily to its highest levels in four years. By early February, the 10-year note had risen by 31 basis points to 2.84% — its highest level since 2016.

The 10-year yield has been below 3% for four years. Investors carefully monitor the 10-year yield as they offer a view of the Federal Reserve and investor expectations for inflation.

Fast job growth and robust corporate earnings are sparking fears that the economy could be heating up, leading to inflation and faster interest rate hikes by the Fed.

The year ahead “will be another year with an active Federal Reserve,” says Greg McBride, CFA, Bankrate.com chief financial analyst, “and one that will see inflation pick up but stay near 2 percent, a further flattening of the yield curve, faster but uneven economic growth, and an overdue stock market correction — though the actual cause of the correction will be anyone’s guess.”

Heightened expectations for inflation and prospects for continued job growth have resulted in bond prices dropping. Interest rates and bond prices are inversely related: When interest rates rise, bond prices decline.

Experts surveyed by Bankrate say expect that trend to continue, with three or more 0.25% hikes by the Fed this year.

Mortgage spike

The rise in the Treasury yield curve has had an impact on fixed-income investments across the financial spectrum.

ETFs that track corporate bonds have been slumping as well. Vanguard’s Intermediate Term Corporate Bond ETF (VCIT) has lost 2.1% since January.

Mortgage rates are not immune to increasing bond yields, either, which could affect housing prices.

“Mortgage rates follow bond yields and forecasting a volatile year on the long end of the yield curve implies the same for mortgage rates,” McBride says.

“Expect mortgage rates to dip below 4 percent, perhaps more than once during the year, and a spike above 4.5 percent before settling around 4.5 percent to close out the year.”

In terms of savings rates, McBride forecasts an average on-year CD yield will be 0.7% and the average return on a five-year CD will be 1.5%.