THE HIGHER-FOR-LONGER INTEREST RATE ENVIRONMENT 🏦
THE NUMBER
2.85%
The Average Level Of The Fed Funds Rate So Far During The 2020s Is 2.85%.
The current environment is considerably higher than the 2010s, when the average level of the fed funds rate was 0.61% and never exceeded 2.5%. Compared to before the Great Recession, however, the fed funds rate this decade is low, as it averaged 7.1% in the 1970s, 9.97% in the 1980s, 5.15% in the 1990s, and 2.96% during the 2000s, with 66% of the months during these four decades seeing a reading at 5% or above. Despite this historical context, the market is full of fear, uncertainty, and doubt today that’s directed at the U.S. government’s more than $40 trillion in debt, equal to 126% of GDP.
THE VISUAL
Note: CAPE ratio and 10-year yield data from Oct. 2016 to Oct. 2026, money market data from June 2016 to June 2026, margin data from Sept. 2016 to Sept. 2026.
Source: The Blind Spot / Data: FRED: Federal Reserve Bank of St. Louis, www.multpl.com, FINRA
Over the past decade, the 10-year Treasury yield and the S&P 500 Shiller CAPE ratio both moved sharply higher, the opposite of how rates and valuations should theoretically behave. Investors are also hoarding cash, a cautious move, and borrowing to buy stocks, an aggressive posture, at the same time. This not only reveals the fear and greed divergence, but it suggests that currency debasement is playing a bigger role in the economy and markets.
THE QUOTE
“In the overwhelming periods of time in my life, the 10-year Treasury has been higher than the level that it's in. And so we can have very, very effective capital markets with that. What creates headwinds for markets is when you have very, very abrupt moves.”
From a long-term historical perspective, one of the most powerful banking executives in the world reminds us that the 10-year Treasury yield is not in uncharted territory. Eventually, the economy and market can successfully adapt to different interest rate environments. What really rattles consumers, businesses, financial institutions, investors, and policymakers, though, is volatility and a rapidly changing backdrop.
THE MENTAL MODEL
Relativity
Applied To The Higher-for-Longer Interest Rate Environment
Whether higher interest rates are good or bad depends entirely on your perspective. The prevailing narrative is that it can present a negative headwind for the economy and stock market, but there are always two sides to the story. It’s easy to overlook, but savers, retirees, low-rate borrowers, fixed income investors, and cash-rich companies are all capitalizing on the current situation.
THE QUESTION
Over the next 12 months, will you actively raise or lower your fixed income allocation relative to equities?
(My take italicized in bold)
Significantly raise (+10 pp or more)
Moderately raise (+3 to +9 pp)
No meaningful change (within ±2 pp): I currently hold no fixed income exposure, so there are no adjustments for me to make over the next 12 months. Interest rate changes, whether hikes or cuts, don’t factor into how I set or rebalance my portfolio allocation. And with a multi-decade time horizon, I’m willing to accept short-term volatility in exchange for maximizing long-term capital growth.
Moderately lower (−3 to −9 pp)
Significantly lower (−10 pp or more)
Reply with your answer
Until next week,
Neil Patel
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