Amid all the fear about higher interest rates, we should not forget that they can be–and we think they mostly are–a sign of economic strength. That may sound controversial, but we’ve been here before. In 2022, sharply higher short rates motivated calls of an “inevitable” recession, yet no recession has landed. The U.S. economy has been so strong that it has withstood the blistering path of rate hikes.
Now in 2023, with short rates near their peak, long-term interest rates have continued to move sharply higher, reaching 4.89% in recent days. Is this a sign of stress that finally delivers the long-feared recession? Or is it again a sign of strength that will force a new balancing act for monetary policy but allow U.S. economic expansion to live on? The answer can be found by checking the gloomy narratives and exploring the mechanics of how strength delivers higher rates.
