Markets Reflect Changing Rate Outlook as Economy OutperformsMarketsReflectChangingRateOutlookasEconomyOutperforms

Market expectations for interest rates have shifted with investors taking stock of a strengthening US economic outlook, pushing up yields and setting a challenging backdrop for the Jackson Hole policy summit that kicked off on Thursday. The benchmark 10-year Treasury yield climbed to its highest level in 16 years this week in a sign that investors are preparing for the Federal Reserve to keep rates higher for longer. Defying predictions for a pronounced downshift, the economy has thus far shown to be less sensitive to rate hikes than the Fed may have anticipated, giving officials room to continue an aggressive campaign against inflation. The Atlanta Fed’s GDPNow model showed the economy was on track for 5.8% annualized growth in the third quarter, an upgrade from the 3.9% estimate recorded at the start of August.

Policymakers may provide some direction on the future path for rates as they gather for the annual Jackson Hole Symposium in Wyoming, headlined by Fed Chair Jay Powell’s speech on Friday. As it moves beyond the stability of the “Great Moderation,” the global economy is exhibiting greater complexity and uncertainty, requiring investors to prepare for when the unexpected inevitably arises. A new post on PGIM Fixed Income’s Bond Blog assesses portfolio implications across a range of potential scenarios for the economy, inflation, and monetary policy.