Sectoral shift in US job openings

Meteoric rise in AI-related semiconductor exports fueling South Korea's export boom

Regional Fed surveys showing further manufacturing acceleration in August

Sharp drop in China demand for oil helping to limit impact of Middle East conflict on the price

Decades high real price of copper posing physical challenge to investment boom

Rising US long-term real yields point to strong demand for investment funding

US retail sales accelerate even as consumers remain gloomy

Retail gasoline price still well above pre-conflict level and now rising again

PMIs showing widespread revival of global economy

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

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Andrew Cates

Kevin Warsh used his first Jackson Hole address as chairman of the Federal Reserve last week to signal that the next move in US interest rates is more likely to be up than down. He is not alone. The European Central Bank raised rates in June and may go further, and several other central banks have turned hawkish. It is a puzzle. Growth has slowed, unemployment has drifted up, and core inflation across the advanced economies is not far above target. Why is the world's monetary tide turning towards tightening?

The official answer is that they are guarding against a shift in expectations. Supply-driven inflation need not persist; it does so only if firms and households come to expect it, and set wages and prices accordingly. Having misjudged the 2021 shock as transitory, central bankers are unwilling to take that chance a second time. So they are tightening not to reverse the shock, which no rate can do, but to keep expectations anchored.

That, though, is the lesser part of the story. The central banks are treating as a cyclical episode what is in truth a change of regime. For a generation the advanced economies enjoyed abundant supply and abundant capital: globalisation held down the price of goods, a global surplus of saving held down the price of money, and monetary policy had only to manage demand. Both conditions are now reversing, together. Supply has become scarce and costly; so has capital; and the two are related. The consequences are large. Inflation of this kind cannot be brought down by interest rates, only resisted at the cost of a recession. The real cost of capital has risen durably, not cyclically. And investors positioned for the old regime — a central bank that eases into every downturn, government bonds that hedge equities, real rates that subside to their former lows — are positioned for a world that will not return.

Supply has tightened on every front. In the past month alone the United States imposed 50 per cent tariffs on Canadian goods; American forces struck Iranian launchers at the Strait of Hormuz, returning Brent above $90; and a glacier collapse on the Nepal-Tibet border destroyed a regional trade route. Each raised costs, and none can be addressed by a policy rate. To these has been added a contraction in the supply of labour. The administration's immigration enforcement, recently extended to withdraw work authorisation from more than a million people, has reduced the workforce available to construction, agriculture and services, and raised wage costs in those sectors. None of this is a temporary deviation from a stable trend. The real cost of energy has risen for a quarter of a century to a record; reshoring is reconstructing supply chains at higher cost; and demographic change was tightening labour markets before enforcement intensified. The cheap and frictionless supply of the globalisation era has ended.

The data bear this out. Decompose US core inflation into demand- and supply-driven components and the demand-driven part has fallen to around one percentage point, with supply accounting for almost the entire excess over target (Figure 1). Across the G10, core rates are grouped close to target, none much above two and a half per cent (Figure 2). The demand that monetary policy governs has already been contained; wage growth is slowing, and market-based measures of inflation expectations remain near target. What sustains inflation above target is supply.

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Figure 1. Supply- and demand-driven contributions to US core PCE inflation. Source: San Francisco Fed (Shapiro decomposition) via Haver Analytics.

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Figure 2. Core inflation across the G10 — latest level and three-month direction. Source: Haver Analytics.

Capital has moved in the same direction, and the investment boom is not the offset it appears to be. The advanced economies are being asked to invest on a scale not seen in decades — in artificial intelligence, the energy transition, defence, and the fiscal deficits that accompany them — while the pool of saving available to fund it is shrinking, as the corporate sector shifts from net lender to net borrower and China channels less of its surplus into Western assets. Artificial intelligence adds to the pressure rather than relieving it: data centres are heavy consumers of electricity, the energy transition brings forward the demand for power and metals, and any supply it may eventually release lies well beyond the capital it now absorbs. The price of capital has already adjusted. The real yield on advanced-economy government debt, having declined for four decades to a record low during the 2022 inflation, has risen to its highest since before the financial crisis (Figure 3). The era of near-zero rates was the anomaly, not the level to which policy will return.

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Figure 3. Advanced-economy real 10-year government bond yield (nominal less CPI inflation), annual average. Source: OECD and national statistics via Haver Analytics; author's calculations.

The central banks, in short, are applying the wrong instrument. They are using a tool that acts on demand against an inflation that originates in supply, and against a cost of capital that has risen for structural reasons; the most it can achieve is a recession that leaves those forces intact. A higher policy rate cannot lower the oil price, replace the workers being removed, or add to the supply of saving. The expectations they are defending show little sign of dislodging, while the recession they would risk in defending them is the greater danger.

Investors are making the opposite error, still positioned for a world that has ended. The central-bank put does not operate when growth and inflation diverge; bonds and equities fall together in a supply shock, as they did in 2022; and the real rate remains high because capital is genuinely scarce, not because policy is temporarily restrictive. The assets that benefit are claims on real resources — energy and its inputs; those most exposed are long-duration bonds and the highly valued equities that a low cost of capital supported. September's decision matters less than the regime that produced it. The age of abundance is over, and neither policy nor markets have adjusted to its end.

The age of abundance is over — and neither policy nor markets have caught up

Charles Steindel

The Federal Reserve Bank of Philadelphia’s state coincident indexes in July showed modest to moderate growth. In the one-month changes, six states-scattered across the nation--had increases greater than .5 percent (Washington, Nevada, Rhode Island,  South Carolina, North Dakota, and Wyoming). Hawaii and Alabama saw declines. Over the three months ending in July six states (West Virginia, Rhode Island, South Carolina,  Delaware, Nevada, and New Hampshire) had increases above 1.5 percent. Kentucky, Hawaii, and Alabama had declines , with Alabama’s index down a marked 1.34 percent. Over the last twelve months, no state saw an increase of 4 percent or more—Nevada’s 3.76 percent was the highest (six other states had increases above 3 percent). Alabama and Connecticut were down, and six others saw increases of less than one percent.  r percent (Idaho was up 3.62 percent), and six others were at or higher than three percent.

The independently estimated national estimates of growth over the last three and twelve were, respectively, .54 and 1.88 percent. Both measures appear to be a bit lower than what the state numbers would have suggested.

State Coincident Indexes in July 2026

Mickey D. Levy

My key observation about the current angst about “high” bond yields: I much prefer high real interest rates associated with healthy economic growth and high returns to capital than low real interest rates associated with economic malaise and low expectations.

Also, while I have long argued that the persistently high government budget deficits and rising debt/GDP are a major problem that involve a misallocation of national resources and must be addressed, I’m not so sure that the recent rise in rates can be attributable to the government’s rising debt.

It’s a tossup between what was more illogical last week, the headlines lamenting “soaring bond yields” or U.S. Secretary of the Treasury Scott Bessent’s announcement that the Treasury had upped its bond buyback program with the hope of lowering yields on long-duration Treasury securities.

A bit of historical perspective is instructive. Current yields are not “soaring” or even “high”—they are in a range that is consistent with current economic and inflation conditions—and these levels are preferable to the low bond yields that characterized the troubled post-Great Financial Crisis period.  And Bessent’s Wall Street career in fixed income presumably taught him that interventions aimed at manipulating the bond market would not work; clearly, his announced intervention was a political ploy to placate President Trump. It didn’t work. I strongly recommend Stanley Druckenmiller’s Wall Street Journal article “[Let the Bond Market Speak](https://www.wsj.com/opinion/let-the-bond-market-speak-81529d74)”, August 24, 2026.

Currently, 10-year US Treasury yields are roughly 4.7%, up from 4.2% earlier in 2026. With inflationary expectations around 2.25%, real rates are in the 2.4%-2.5% range. It’s likely that real rates would be even higher if not for the Trump Administration’s tariffs, clampdown on immigration and other policies that have dampened real growth and threatened longer-run potential. Current real rates are above the low bond yields during 2010-2014 (they ranged between 2.5%-3.25%) that were associated with the disappointingly soft economic recovery from the Great Financial Crisis, lingering high unemployment and diminished expectations, the Fed’s zero interest rates and extended asset purchases and worries that inflation was too low, but significantly below the bond yields of the 1990s and modestly below those that prevailed during portions of the early 2000s.

A cursory comparison of recent decades suggests clearly that the post-GFC period was aberrant period. (Federal Reserve Bank of New York research “[Measuring the Natural Rate of Interest](https://www.newyorkfed.org/research/policy/rstar)”, 2026, estimates that the 2009-2014 period was the low point of the natural rate in modern history.) Yet many financial market participants and commentators use the low rates of that aberrant period as the benchmark for characterizing current yields as high and rising, when economic conditions are far different.

Chart 1 shows 10-year Treasury bond yields and core PCE inflation since 1990. Chart 2 shows the inflation-adjusted bond yields (a measure of inflationary expectations is not available back to 1990) and their correlation to productivity gains.

260825ML1.jpg

260825ML2.jpg

Bond yields were modestly higher in the early 2000s than currently, particularly in real terms, reflecting the economic growth of the period. Obviously, the debt-financed housing bubble and excesses in the MBS market were part of a misallocation of capital that precipitated the GFC.

The most instructive comparison is between current conditions and the 1990s. Bond yields in the 1990s were much higher than currently, in real and nominal terms, associated with solid productivity-driven economic growth, high returns to capital and high expectations. 10-yr Treasury yields hovered between 6.5%-7% during 1994-1997 and averaged 5.4% in 1998-1999, while inflation-adjusted yields were above 4% for most of the period.

The economic and financial highlights of the 1990s included strong growth and rising wealth (the stock market and housing appreciated faster than the economy); the Fed’s highly successful mid-expansion cycle tightening (February 1994-February 1995) that lowered inflationary expectations and resulted in a soft economic landing; Alan Greenspan’s pushback on tightening monetary policy in response to the strong growth and declining unemployment because he believed the productivity boom would lift real growth and constrain inflation; and strength in capital markets and subsequent decade-end surge in capital markets that culminated with the dot.com bubble.

As a side note, one big difference between the dot.com driven stock market of the late 1990s and the stock market of the 2020s is the dramatic speed of the implementation of AI into commerce and society and the magnitude of the revenues and profits of the AI industry, compared to the lack of revenues and profits of a majority of the dot.com firms of the 1990s.

A second side note contrasts the U.S. government budget in the 1990s to the current situation of worrisome budget deficits and rising debt, with some irony. In the 1990s, budget deficits shrank and toward decade-end, there were budget surpluses that shrank government debt outstanding. This trend reflected sizable declines in defense spending related to the “peace dividend” associated with the end of the cold war combined with the surge in tax revenues related to capital gains taxes generated by the strong stock market.

Fed Chair Greenspan subsequently testified to Congress that declines in government debt were potentially harmful to the US Treasury market and financial markets, and recommended tax cuts (“[Outlook for the federal budget and implications for fiscal policy](https://www.federalreserve.gov/boarddocs/testimony/2001/20010125/default.htm)”, Committee on the Budget, U.S. Senate, January 25, 2001). However, while the government budget imbalance was improving in cash flow terms, it was deteriorating on an accrual basis, and longer-run projections of future deficits and debt were mounting, reflecting the pending retirement of the post-war baby boom generation.

Policymakers of the 1990s failed to address these issues, and those demographics now dominate the current budget and projections of the future. The shrinking government debt/GDP ratio in the 1990s played little role in the financial market debate about bond yields, whereas in the current environment even small moves in yields draw attention to the extraordinarily high and worrisome budget deficits and debt.

While I have long argued that the persistently high government budget deficits and rising debt/GDP are a major problem that involve a misallocation of national resources and must be addressed, I’m not so sure that the recent rise in rates can be attributable to the government’s rising debt.

The bottom line is today’s real Treasury bond yields largely reflect the healthy economy and high expected returns on capital, despite erratic policies that constrain growth (Of course, other factors are at play; currently, as shown in Chart 3, high oil prices are clearly influencing bond yields.)

260825ML3.jpg

That doesn’t mean that every investment in AI will provide a healthy return or that the economy will not hit speed bumps along the way. (Nor can the weak housing activity be blamed on “high” mortgage rates; that is attributable primarily to the 50% surge in home values in the early-2020s that the Fed contributed to). But it does reflect the historical perspective that interest rates tend to reflect the economic and inflation conditions of the day. I would prefer even higher real rates and a stronger real US dollar that would stem from reasonable and predictable pro-growth economic policies.

Putting Current Bond Yields into Historical Perspective

Viewpoints: March 2022

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