The Second Stage of Tightening

Three Bridgewater CIOs on the implications.

Looking ahead, Bridgewater CIOs Bob Prince, Greg Jensen, and Karen Karniol-Tambour expect a “grinding pressure on growth.” As market outlooks go, this is about as intelligent and perceptive as it gets. We republish it here with the expressed permission of Bridgewater Associates.

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Implications of the Next Stage of the Tightening Cycle

While it is happening through the bond market, the implications of the second tightening cycle go far beyond bonds.

For the economy, we should see higher short-term and long-term rates for longer produce a grinding pressure on growth. As future easing is pushed back, the level of real interest rates has vastly diminished the incentives to borrow and leverage up relative to the stimulative real rates of the past 15 years. The credit system is healthy enough that an acute contraction in credit is not the most likely outcome, but a higher level of rates that persists for longer will close the arbitrage between the level of interest rates and the level of growth (changing the economics of leveraging up private assets) and, on the margin, will redirect income from spending to debt service, as existing debts are refinanced at higher interest rates.