Yesterday, after the inflation report came out, I wrote that as inflation expectations increase, the interest rates investors will accept will climb slowly. Equity markets won't throw a fit at 2.85% interest rates as they did just recently. Instead though, it could be smooth sailing until 10-year interest rates hit 3.00%. And then we see more market volatility. But once that level settles in, the acceptable rate might climb to 3.25%. And we will repeat the process all over again.
This is how late-cycle interest rate hike regimes work. But at some point, there will be a negative impact on credit and that will feed through into the real economy. That's the view I presented last night when I spoke to Peter Armstrong on CBC's on the Money program. Below is the video clip. But let me expand ...
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.