{"id":9772,"date":"2021-08-16T15:10:35","date_gmt":"2021-08-16T15:10:35","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9772"},"modified":"2022-02-26T13:05:37","modified_gmt":"2022-02-26T13:05:37","slug":"why-arent-interest-rates-rising-with-inflation","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/why-arent-interest-rates-rising-with-inflation\/","title":{"rendered":"Why Aren&#8217;t Interest Rates Rising With Inflation?"},"content":{"rendered":"\n<p><em>Brianna J. from Las\nCruces, NM asks: <\/em>Good Afternoon Mr. Zacks, I\u2019m writing with a question\nabout interest rates and inflation. I\u2019ve always heard that when inflation goes\nup interest rates usually go up as well. But the opposite is happening now. Can\nyou explain the disconnect?<\/p>\n\n\n\n<p><strong>Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n<p>Thanks for sending in your question, Brianna. Let me first\noffer a visual to readers who may not be following the inflation and interest\nrate dynamic as closely as you. The blue line in the chart below represents the\n10-year U.S. Treasury bond yield while the red line is charting the consumer\nprice index excluding food and energy. It\u2019s clear to see the two lines have\ndiverged greatly over the last few months: <\/p>\n\n\n\n<p><strong>Interest Rates are\nFalling While Inflation Goes Up<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/4_pic1-1-1024x395.png\" alt=\"\" class=\"wp-image-9773\"\/><figcaption> <strong><em>Source: Federal Reserve Bank of St. Louis<sup>1<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n<p>_____________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-volatility-guide?source=zim&amp;medium=email&amp;term=mitchsmailbox_zim_2021_08_11&amp;content=volatility_guide \">Tips on Managing Market Volatility<\/a><\/strong><\/p>\n\n\n\n<p>Volatility\nhas a way of causing even the most experienced investor to make mistakes\u2014that\u2019s\nwhy it is important to not avoid it but to develop a mental approach to dealing\nwith it. <\/p>\n\n\n\n<p>Our\nguide, \u201cHelping You Manage Market Volatility,\u201d will provide you with insights\nand tips to do just that. Get answers to questions like:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Market downturns can and will occur, but what should you do?<\/em><\/li><li><em>When volatility is too much for you to handle, how can a money manager help?<\/em><\/li><li><em>Can volatility actually be an opportunity?<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!<br> \u00a0<br><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-volatility-guide?source=zim&amp;medium=email&amp;term=mitchsmailbox_zim_2021_08_11&amp;content=volatility_guide \">Download Zacks Volatility Guide, \u201cHelping You Manage Market Volatility.\u201d<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-volatility-guide?source=zim&amp;medium=email&amp;term=mitchsmailbox_zim_2021_08_11&amp;content=volatility_guide \">2<\/a><\/sup><\/strong><\/p>\n\n\n\n<p>_____________________________________________________________________________<\/p>\n\n\n\n<p>As you mention in your question, we would generally expect\ninterest rates to rise as inflation goes up, as investors would demand a higher\nyield to compensate for the reduced purchasing power that comes with\ninflationary pressure. But we\u2019re seeing just the opposite today. <\/p>\n\n\n\n<p>I think there are two factors to consider when explaining\nthe divergence between inflation and interest rates. The first is the distinct\npossibility that inflation may be transitory in nature, which remains the\nassessment of the Federal Reserve currently. The thinking here is that the\nsurge of demand has created temporary disruptions in supply chains and in the\nlabor markets, which is putting upward pressure on prices over the short term.\nThe Fed believes supply will eventually catch up with demand, and these\npressures should abate with time. Falling interest rates today may be signaling\nthis eventual outcome. <\/p>\n\n\n\n<p>Another possible explanation is that too many investors\npiled into the view that longer duration Treasury bond yields would surely head\nhigher, on the heels of rising inflation and a too-hot economy. Betting that\nTreasury yields would move higher is also a bet that Treasury prices would\nfall, and data suggests many institutional investors made bets against Treasuries\nthis year-to-date. This set the table for short covering as investors kept\nbuying bonds, which ultimately kept downward pressure on yields.<sup>3<\/sup><\/p>\n\n\n\n<p>At the end of the day, the move in Treasuries is likely a\ncombination of many factors, which likely include \u2013 in my view \u2013 a more modest\noutlook for inflation and the expectation that the U.S. economy will settle\ninto a post-pandemic steady growth rate sooner than later. &nbsp;<\/p>\n\n\n\n<p>While the\neconomy is headed for steady growth, that does not mean there will not be\nvolatility along the way. You can\u2019t eliminate volatility, but you can learn how\nto navigate through it. <\/p>\n\n\n\n<p>To help\ngive insight into some ways you can do this, check out our guide, \u201cHelping You\nManage Market Volatility.\u201d<sup>4<\/sup>&nbsp;It will provide you with insights\nand tips to do just that. Get answers to questions like:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Market downturns can and will occur, but what should you do?<\/em><\/li><li><em>How can diversification help you manage volatility without compromising your returns?<\/em><\/li><li><em>When volatility is too much for you to handle, how can a money manager help?<\/em><\/li><li><em>Can volatility actually be an opportunity?<\/em><\/li><\/ul>\n\n\n\n<p>If you\nhave $500,000 or more to invest and want to get answers to the questions above,\nclick on the link below to download this guide today!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The consumer price index has shot up, but interest rates have dropped. Mitch discusses some possible reasons. <\/p>\n","protected":false},"author":3,"featured_media":7436,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-9772","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9772","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9772"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9772\/revisions"}],"predecessor-version":[{"id":10338,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9772\/revisions\/10338"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9772"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9772"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9772"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}