70% Chance of Further Rate Hike by Fed... Warning of 'Lagged Shock' to US Economy

US 10-Year Yield Surpasses 5.2%... Pressure on Housing, Stock Market, and AI Investments

"If rates rise further, the economic shock will intensify"

"Ultimately, it could affect employment"

[Block Media Reporter Lee Jeong-hwa] Despite US interest rates soaring to their highest levels in decades, analysts suggest that the real issue lies in how quickly rates will rise in the future rather than the current levels.

If rates continue to rise, the pressure will extend from mortgage loans and credit cards to corporate investments in artificial intelligence (AI), as well as stock and bond prices, potentially leading to job losses and economic slowdown.

70% Chance of Further Rate Hike by Fed... 10-Year Yield Exceeds 5.2%

The New York Times (NYT) reported on the 25th (local time) that while both short-term and long-term interest rates in the US are already burdening households and businesses, the speed of the current rate increases and their future trajectory pose a greater risk. Although the US economy has grown in the past at higher interest rates, rapid rate increases can deliver shocks to the economy with a lag.

The yield on US 10-year Treasury bonds surpassed 5.2% on the 24th, up from 3.97% on February 27, just before the war in Iran. The US mortgage rate has also crossed 7% this week, marking the first time it has exceeded this level since January 2025. The financing costs for AI data centers, which rely on credit cards and student loans, are also rising.

There is a possibility that rates will rise further. The financial markets are reflecting about a 70% chance that the Federal Reserve (Fed) will raise the benchmark interest rate by 0.25 percentage points at the Federal Open Market Committee (FOMC) meeting on October 27-28. If this occurs, the target range for the benchmark rate will increase to 4-4.25%.

This is because the US economy is showing stronger-than-expected performance, and inflationary pressures are not easing. In September, US business activity increased at the fastest pace in five years. Retail sales and employment also exceeded expectations.

On the other hand, international oil prices are above $100 per barrel. Diesel prices have surged, pushing up production and transportation costs. The enthusiasm for AI investments continues.

Voices within the Fed are also suggesting the possibility of further tightening. John Williams, president of the New York Federal Reserve Bank, stated that it is "reasonable" to consider additional hikes before the end of the year. Michael Barr, a Fed governor, indicated that further rate increases are necessary.

If Rates Rise Further, Pressure on Housing, Consumption, and AI Investments

If rates rise further, the first to feel the burden will be households and businesses that rely heavily on loans.

With mortgage rates exceeding 7%, any further increase will increase the interest burden on homebuyers. Household financial costs, including credit cards and student loans, will also rise. The longer high rates persist, the less disposable income there will be for consumption.

The same goes for businesses. Large-scale projects that require significant funding, such as AI data centers, will face increased financing costs as rates rise.

The stock market is also under pressure. The NYT explained that this year’s rate hikes have repeatedly shaken the stock market. So far, the increase in corporate profits driven by the AI boom has offset this. According to FactSet, S&P 500 corporate profits are expected to increase by 28.9% year-on-year over the three months leading up to September.

However, if rates continue to rise, the situation could change. High rates increase the cost of capital for businesses while simultaneously lowering the present value of future profits. This could particularly increase the valuation burden on growth stocks, which have already reflected future growth expectations in their prices.

Bond investors could also face losses. This year, bond fund prices have collectively fallen due to rising rates. However, if rates stabilize at a high level, the interest income from newly added bonds will increase, which could have a positive effect for long-term investors.

Ultimately, It Could Affect Employment

The greater risk is that high rates will slow down the entire economy.

Austan Goolsbee, president of the Chicago Fed, warned that to bring inflation down to target levels in the short term, employment may have to be sacrificed. The current unemployment rate in the US is 4.1%.

A rise in rates does not immediately mean a recession. According to the NYT, from 1984 to July 2007, the average US benchmark rate was 5.3%, and the average yield on 10-year Treasury bonds was 6.7%. Although these were higher than current levels, the US economy grew at an average rate of 3.3% during this period.

Thus, the key is not the absolute level of interest rates but the speed of increases and whether the economy can absorb them.

Currently, the yield on 10-year bonds has jumped more than 1.2 percentage points from 3.97% at the end of February to over 5.2% in just seven months. Economist James Paulsen expressed concern that financial conditions may already be more restrictive than the Fed perceives. The shock of rapid rate increases may manifest with a lag.

The Fed is also under pressure. If rates are not raised sufficiently, market confidence in the Fed's commitment to curbing inflation may waver. Conversely, if further hikes are made repeatedly, the risk of excessively burdening housing, consumption, corporate investment, and employment increases.

The NYT reported that the biggest issue is not the current level of rates but how high they will go and which parts of the economy will be unable to withstand the pressure during that process.

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