Economic Outlook – Fall 2023 | “Interest Rates – Will They Break Through the ‘Ceiling’?”

The rally in financial markets reversed course in the 3rd quarter as the continued increases in interest rates have caused more concern about the health of the economy. After a first half of strong returns, the S&P 500 fell by over 3% in the third quarter. Those losses continued into the 4th quarter as the S&P 500 dropped another 2% in October as interest rates continued moving higher.

The chart below shows the yield curves as of October 31st, 2023, and the year-ends 2022 and 2021.  One thing to point out is the market’s expectation that the Fed may be done increasing short-term rates. This is illustrated by the absence of the “hump” at the short end of the curve from 12/31/2022 to 10/31/2023. If interest rates out 3 and 6 months are the same or lower than the Fed Funds rate, that means that markets are not expecting further increases. It is worth pointing out that the grey-shaded area of the chart is the range of interest rates over the past 15 years, and as of October 31st, we were bumping against that upper bound.

Figure 1 | Source:

Should investors lock in these relatively high rates? Historically, interest rates have had episodes where they were much higher than the current curve. The 10-year Treasury, for example, hit its highest yield since June of 2007 of 4.99% in mid-October 2023. To put that in perspective, the 10-year rate fluctuated between 6-8% in the ’90s, and in September of 1981, the 10-year was yielding almost 16%! So, while the market is expecting interest rates to flatten out and potentially decline over 2024, it is also possible they are not done going higher.

Inflation – Is it Under Control?

Inflation continues to be the headline in the financial press – for good reason. Inflation disrupts the normal balance between stocks and bonds and limits the hedging power bonds have in a diversified portfolio. Under “normal” inflation pressures, stocks and bonds tend to move in opposite directions. When stocks are down bond prices typically appreciate; known as the “flight to safety” that occurs when the market is less than optimistic.

The chart below illustrates the Consumer Price Index (CPI), the average yearly change in the cost of goods, along with the Fed’s discount rate, the rate the Fed charges to banks who borrow from them. Inflation has come down from its high of 8.9% in June of 2022 to 3.7% as of October. With that lowering of inflation the Fed has been able to slow, and now pause, the increase of interest rates. We will watch closely what the next couple of monthly inflation readings bring.

Figure 2 | Sources:;

The next chart shows the monthly CPI readings along with the individual components of these readings. Many of the components, including food, apparel, and vehicles have moderated throughout 2023 while others, like shelter and some energy components, have continued to be sticky.

Figure 3 | Source:

So far, the Federal Reserve has taken a “hawkish pause” and held the discount rate constant since July. Short-term rates closely follow that rate whereas longer rates are more impacted by the Federal Reserve’s narrative and the market’s interpretation. Lately, we have been hearing “higher for longer” which means the market is starting to believe higher interest rates will be around for a longer time. This increases the rate of return investors require to invest, and ultimately translates to a lower price they are willing to pay.

The Labor Market and the Federal Reserve’s Balancing Act

The Federal Reserve’s mandate is to enact policies that pursue two separate goals: stable prices and full employment. Sometimes these goals can be at odds with one another. For instance, very high levels of wage growth can lead to increased consumer spending that may drive up the price of goods and services (inflation). Low levels of unemployment give the Federal Reserve the leeway to keep rates higher or even increase them. Therefore, the labor market is closely watched by the Federal Reserve. From the chart below we can see that wage growth has been well above the 50-year average of 4% since coming out of COVID, and the unemployment rate has remained well below the 50-year average of 6%. This gives the Federal Reserve the leeway we mentioned above to increase rates and keep them there until one of the 2 factors, inflation or unemployment, significantly changes.

Figure 4 | Source:

Housing – Interest Rates and Home Prices

Home prices fell briefly in the fall/winter of 2022, as demand is usually lighter in the colder months. However, home prices increased along with interest rates through the spring of 2023. Higher mortgage rates have stunted new residential construction, putting a strain on housing supply. September saw a 7% decline in housing starts from the year prior and a 14% decline from May of 2023. Time will tell if the supply and demand for housing will stabilize due to increased rates and economic uncertainty. Mortgage rates are highly correlated with the US Treasury 10-year rates since the end investor is the one who bears the risk. Unfortunately, home seekers may continue to experience elevated mortgage rates subject to market sentiment.

Figure 5 | Sources:;

Purchasing Managers Indices

The manufacturer’s purchasing manager Index for October posted a reading of 46.7. The index measures the spending, production, new orders, and employment of manufacturing companies nationally. Reduced index readings signal less output and production within the US economy.  A reading below 50 historically indicates economic contraction. The index has posted readings below 50 since the end of 2022.

The purchasing managers index for services for October posted a more optimistic reading of 51.8. This is still low and below where it trended in 2021 and 2022 but not below that important 50 level. As the chart below shows, it has gotten very close multiple times this year.

Figure 6 | Source:

The Bottom Line

Given the uncertainty of the economic backdrop, we are maintaining a conservative tilt in our asset allocation. We continue to monitor new and impactful economic data that could signal changes in monetary policy and market sentiment and will make appropriate portfolio decisions accordingly. Our base case is that interest rates are near their peak and will remain at these elevated levels for some time. We do expect that we will see a slowdown in economic activity in 2024, whether that will be a full-fledged recession or a more modest contraction.

If you have any questions about the current market environment, please do not hesitate to call us. We look forward to helping.

Contact Our Trust Officers


Keith J. Akre, CFA, CFP® – Vice President & Trust Officer

Eric Haugdahl – Investment Associate

Opinions expressed are solely our own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Wealth Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.