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US economy in focus as inflation fears return to market

us economic strength causing a problem for policy makers
© Adam Dillon

The resilient US economy is back in focus this week as 10-year Treasury yields hit 5%.

The growing concern among policy makers is that the US may need additional rate hikes to further cool the economy as recent jobs data shows continued momentum.

With the dollar gaining against most foreign currencies this past week, yields rose sharply on 10-year Treasuries. Conflict in the Middle East has also put upward pressure on oil prices with regional power Iran calling for an oil embargo.

While the US economy has shown to be more resilient than other G7 nations, its high level of borrowing and a rout in the bond markets have put further strain on Treasury yields, now at their highest level since the summer of 2007.

Meanwhile the Fed warned this week that lower economic growth may be needed to reduce inflation in the long-term. The only way for this to be achieved would be for rates to stay higher for longer, or to see additional interest rate hikes in the coming months ahead.

However, the complication for policy makers is what’s happening internationally which could slow economic growth down in the coming months ahead. On the flip side, if the US economy continues to grow at pace, the strong dollar could put further pressure on other countries to sell treasuries to support their local currencies – pushing yields higher still.