Source: Institutional Investor —
The Federal Reserve’s primary tool for influencing the real economy is in its ability to set short-term interest rates, resulting in shifts in the shape of the yield curve as it responds to the interplay between the economic environment and fiscal policy. With inflation having soared, the Fed has shifted in 2022 to withdrawing accommodation, raising rates and shrinking its balance sheet.
Higher bond yields impact the financial markets through a repricing of equities to reflect new competition from fixed income, as well as to incorporate the removal of incentives for risk-taking that come with a super accommodative monetary policy. As for the U.S. real economy, rate hikes hit first through their direct impact on mortgage rates.
