(Bloomberg Markets) -- Benchmark US Treasury yields have shot from less than 1% in 2020 to more than 4%, reflecting the raised costs of financing for everyone from mortgage borrowers to business startups. We asked leading economists and investors to reflect on the consequences of tighter money. Their responses have been edited for clarity and length.

How are  higher interest rates  changing  the world?

Carmen Reinhart  Former chief economist, World Bank; professor at Harvard Kennedy School

We’ve transitioned from years of negative real interest rates [accounting for inflation], which benefited borrowers over savers, to the reverse. The savers are getting a positive rate of return, which has been the historical norm. Negative real interest rates are a rarity, not a regular feature of history. Anybody taking on new debt is going to find it costlier. Importantly, that includes the government. Debt-servicing burdens in many emerging markets and developing markets had begun to rise even before the rise of interest rates. The big fear has been a replay in the 1980s debt crisis, which importantly impacted middle-income countries like Mexico and Brazil. However, this is not a replay of the 1980s, at least not yet. There’s a big divide so far between the resilience of middle-income countries and their low-income counterparts.

Janet HenryGlobal chief economist, HSBC Holdings Plc

The vast majority of people work for smaller companies. The more that policy tightens, and the more that smaller firms feel the impact, it will affect their investment and hiring and feed through to the labor market. It doesn’t mean we’re going to see a massive jump in unemployment. We’d be extremely surprised if we went back to a zero- or low-rate world, but nor do I think this is the 1970s. This new normal is one where growth is a bit lower than we had pre-pandemic—inflation is a bit higher. I don’t think this is a world like before, when central banks were struggling to get inflation up to 2%.

Earl DavisHead of fixed income and money markets, BMO Asset Management Inc.

The yield or interest rate itself is irrelevant. What’s relevant is the adjustment to that yield. That adjustment is always characterized by some sort of pain, whether you’re going higher or lower, by design. When you’re going higher, you’re trying to reduce growth by raising the cost of capital for businesses. What you want to avoid is a vicious cycle. We’re on the precipice of it, the longer you maintain deficits at this level with these rates.

Craig BergstromManaging partner and chief investment officer, Corbin Capital Partners LP

Compared to last year, it feels like volatility, or the perception of rate volatility, has generally come down a little bit. People are no longer saying, “I think rates are going to go to 2%” or “I think rates are going to keep going up to 8%.” Now it’s more like, “This is the world we live in, and if this environment makes sense to transact, then we go for it.” Where we haven’t seen that is in commercial real estate. Buyers and sellers are just too far apart.

Brad SetserFormer staff economist, US Department of the Treasury; senior fellow, Council on Foreign Relations

At an 8% rate for mortgages, a lot of new homebuyers in the United States are effectively priced out of the market. The same is broadly true for emerging markets. The stronger emerging markets can still borrow, but weaker emerging markets can’t realistically access external finance. That’s how rate hikes work—they price out marginal borrowers. The US dollar is a global currency, so rate increases price out US borrowers as well as global ones.

China has more scope to keep its currency fixed than most, thanks to its capital controls, and it has maintained interest rates below US rates. Still, with higher US rates, China’s currency management is under pressure, and the state banks have stepped in to limit volatility. If China wants to keep the yuan basically stable at 7.3 [per dollar], the central bank may find it difficult to lower rates further. China, though, does have a lot of dollar assets, and its portfolio stands to benefit from higher returns on its holdings of US bonds.

Joe DavisGlobal chief economist, Vanguard Group Inc.

A lot of people keep coming back to the fact that the Federal Reserve has raised rates 5 percentage points. Yes, that’s true. But they’re coming from a policy point we hadn’t seen since World War II—they’re digging themselves out of a very large hole. We believe the rise in real interest rates is going to be with us for a little bit. I think it’s the most positive financial market development in the last 15 years. It doesn’t mean there won’t be turbulence. But if you’re an investor with a three or more year time horizon, you’re cheering for this because of the compounding effect [of the higher rates you’ll earn].

Ellen ZentnerChief US economist, Morgan Stanley

Higher interest rates are having the intended effect on households by restricting credit, though the impact is uneven. While consumer spending overall has been strong and seemingly impervious to higher interest rates, cracks in credit have begun to show. Delinquency rates among younger and lower-income households have surged for credit cards and auto loans. These households are more sensitive to interest-rate increases, because they are more likely to revolve balances on credit cards, which are subject to a 25% or higher interest rate, while excess savings have been depleted for these households and growth in labor income has been slowing. An historical comparison of today’s interest rate to previous business cycles is not as informative as you’d think: The appropriate level for interest rates depends heavily on the current economic backdrop, including the degree of tightness in the labor market, inflationary pressures and growth in GDP. Today’s strong growth, low unemployment rate and high inflation call for a higher rate of interest, but how high and for how long is the question.

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