Stock sell-offs per­sist

In­ter­est rate in­creases hit­ting mar­kets

Las Vegas Review-Journal - - FRONT PAGE - By Josh Boak The As­so­ci­ated Press

WASH­ING­TON — This week’s dizzy­ing sell-offs in the fi­nan­cial mar­kets have been a rude re­minder that the U.S. econ­omy is no longer re­ly­ing on ul­tra-low in­ter­est rates to fuel growth.

Bor­row­ing costs are ris­ing for com­pa­nies, home­buy­ers and the U.S. gov­ern­ment —

all of which could even­tu­ally dampen eco­nomic growth.

Yet the climb in in­ter­est rates also re­flects an econ­omy that’s still man­ag­ing


to ac­cel­er­ate on the en­ergy of an ex­pan­sion in its 10th year — the sec­ond-long­est such streak on record. The pace of growth has picked up this year in part be­cause of Pres­i­dent Don­ald Trump’s tax cuts, which have also in­creased the fed­eral bud­get deficit and con­trib­uted to the higher rates now spread­ing through the econ­omy.

The Dow Jones In­dus­trial Aver­age fell 545 points Thurs­day af­ter drop­ping 831 points Wed­nes­day. The two-day loss of 5.3 per­cent is the big­gest for the Dow since Fe­bru­ary.

The S&P 500 is also down more than 5 per­cent over the two days and af­ter fall­ing for the past six trad­ing days is al­most 7 per­cent be­low its Sept. 20 high.

The S&P 500’s cur­rent de­cline is the long­est since a nine-day skid shortly be­fore the 2016 pres­i­den­tial elec­tion. It has climbed 27.5 per­cent since Trump was elected and is still up 2.1 per­cent in 2018.

Trump blames Fed

For the mo­ment, Trump is con­tent to blame the Fed­eral Re­serve and its grad­ual rate hikes for the stock mar­ket 5 per­cent drop this week.

Fed of­fi­cials last month raised its key short-term rate for the third time this year, and a fourth hike is likely be­fore year’s end.

Jerome Pow­ell, whom Trump el­e­vated to the Fed’s chair­man­ship, is try­ing to keep in­fla­tion in check and un­wind the cen­tral bank’s pro­grams that were launched to res­cue the econ­omy af­ter the 2008 fi­nan­cial cri­sis. Much of the Fed’s ef­forts af­ter the cri­sis de­pended on keep­ing bor­row­ing rates at record lows for seven years.

But Trump now sees the Fed’s grad­ual re­turn of rates to nor­mal lev­els as dis­rupt­ing the stock mar­ket and an eco­nomic boom that he ar­gues would oth­er­wise en­dure for many years.

“I think the Fed is out of con­trol,” the pres­i­dent told re­porters Thurs­day. “I think the Fed is far too strin­gent, and they’re mak­ing a mis­take and it’s not right. De­spite that, we’re do­ing very well, but it’s not nec­es­sary in my opin­ion. And I think I know about it bet­ter than they do.”

Econ­o­mists gen­er­ally view the re­cent rate in­creases as a nat­u­ral re­sponse to im­proved growth. The un­em­ploy­ment rate has reached a 49-year low of 3.7 per­cent. Most pri­vate fore­casts ex­pect the econ­omy to ex­pand roughly 3 per­cent this year, up from 2.3 per­cent a year ago.

Against that back­drop, a rise in bor­row­ing rates may not be cause for alarm.

“Higher in­ter­est rates need not be a threat — they can and should be taken as a sign of eco­nomic strength,” said Carl Tan­nen­baum, chief economist for North­ern Trust.

With growth ac­cel­er­at­ing, de­mand for credit typ­i­cally also in­creases. And that ad­di­tional de­mand for debt gen­er­ally causes bor­row­ing rates to climb.

Some of that greater de­mand has come from the fed­eral gov­ern­ment as the bud­get deficit has jumped $232 bil­lion so far this fis­cal year, largely on the need to fi­nance the pres­i­dent’s tax cuts. The rate charged on 10-year U.S. Trea­sury notes has surged from 2.46 per­cent at the start of 2018 to nearly 3.16 per­cent.

“The big dif­fer­ence be­tween now and a year ago is tax re­form,” Tan­nen­baum said. “We all an­tic­i­pated it would have a very pow­er­ful short­term im­pact on eco­nomic ac­tiv­ity.”

No down­turn in near fu­ture

But faster growth can pro­duce some pain for the stock mar­ket and home­buy­ers as rates ad­just up­ward. Should rates surge too much, they could trig­ger a re­ces­sion as com­pa­nies and con­sumers strug­gle to re­pay debt. For now, most econ­o­mists foresee no down­turn in the near fu­ture.

The Fed is try­ing to steer growth for­ward while avoid­ing an ac­cel­er­a­tion in in­fla­tion. But by rais­ing its short-term rates, it’s re­strict­ing a pool of credit that has bol­stered the multi-year stock rally. The re­sult­ing higher rates have led many in­vestors to un­load shares.

Over the past week, U.S. and global mar­kets have sold off at a speed that has jolted mar­ket watch­ers. The pres­i­dent’s es­ca­lat­ing se­ries of tar­iffs against im­ports from China are con­tribut­ing to the con­cerns.

“In the past few days, a hand­ful of com­pa­nies ex­posed to trade with China have dis­cussed how the tar­iffs are start­ing to ad­versely im­pact their busi­ness through both higher costs and slower de­mand,” Mark Hae­fele, chief in­vest­ment of­fi­cer at UBS Global Wealth Man­age­ment, said in a note to clients.

Stocks are far from the only mar­ket be­ing hurt by higher in­ter­est rates. Home­buy­ers also stand to feel some pain.

The aver­age 30-year fixed rate mort­gage jumped this week to

4.9 per­cent, the high­est level in seven years, ac­cord­ing to mort­gage buyer Fred­die Mac. Higher rates in­crease the costs for would-be home­buy­ers and could stymie home sales, which could also de­press con­sumer spend­ing.

Danielle Hale, chief economist at real­, pre­dicted that aver­age rates will reach 5 per­cent and said first-time buy­ers might pull back from the mar­ket.

“They might have to pause and re­assess, and it might im­pact their bud­get enough that they step out of the hous­ing mar­ket and wait and save more money for a down pay­ment,” Hale said.

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