Will rising interest rates choke off the expansion?

The further rise in 10-year Treasury yields to their highest level since 2011 dominated the markets this week and there are signs that the Fed’s policy tightening is starting to feed through to the wider economy, with the borrowing costs faced by consumers and firms rising steadily in recent quarters. Unlike in the mid-2000s, the current low level of debt relative to incomes means that higher interest rates are unlikely to cause another crisis. But households’ debt servicing costs are now rising steadily and will continue to eat into disposable incomes. As the temporary boost from the tax cuts fades, rising interest rates will start to take a more serious toll on activity.