Ballooning debt poised to prick Fed optimism

INTEREST

rates surged on Wednesday by much more than the Federal Reserve probably would have liked.

The Fed concluded its two-day Open Market Committee policy meeting by announcing another one quarter of a percentage point increase in its federal funds rate.

That’s the sixth 0.25 percent hike in the current cycle that started in 2015.

This was the first meeting in which new Fed Chairman Jerome

Powell was in charge. The Fed also said there would be a total of three hikes this year — of which Wednesday’s was the first.

But the Fed’s communiqué indicated that it came close to announcing a fourth hike — and that could still happen if economic statistics warrant it.

Announcing four hikes would have made the stock market sad.

The bond market, which makes up its own mind about rates, didn’t particularly like what the Fed was up to.

The interest rate on the closely watched 10-year government note rose sharply, to 2.92 percent, right after the Fed’s announcement. That was a monstrous spike in rates from the 2.85 percent rate before the Fed acted.

There will also be three rate hikes in 2019 and three more in 2020, according to the Fed.

Upon the Fed news, the stock market inexplicably was initially thrilled — even as bond prices dropped sharply, pushing rates up. The Dow Jones industrial average spiked 100 points immediately after the 2 p.m. Fed announcement, and later rose as much as 250 points.

But by the time trading ended, the Dow was at 24,682, down 45 points.

The Fed said it believes the US economy will grow at a 2.7 percent annual rate in 2018. That’s optimistic, since growth is probably running right now at less than a 2 percent annual rate — although there are some independent projections that are higher.

The optimism for the rest of 2018 is likely based on the fact that the tax cuts enacted late last year by President Trump and Congress should help the economy. On the other side of that coin, those same cuts could cause fear about the nation’s ballooning debt and force the Fed to increase rates more aggressively than it would have.

The Fed also thinks that economic growth will slow slightly over the next two years — a prediction that makes those three rate hikes predicted in 2019 and 2020 a little puzzling.

As I’ve been saying, some of what the Fed is doing wouldn’t make a whole lot of sense if these were normal times. But with the US debt now over $21 trillion and the stock market acting exuberant without much reason, the Fed is probably acting in a more stern fashion about rates than it ordinarily would.

The Fed wants rates higher because it will need room to cut borrowing costs when the economy slows. But it also needs to get money back in the hands of savers, who have been essentially paying a hidden tax on their assets ever since the Fed brought rates down to an extraordinarily low level more than 10 years ago.

In Wall Street lingo, the Fed is “normalizing” its policy. The Fed also believes the unemployment rate will soon decline to 3.6 percent, from the current 4.1 percent.

Here’s the problem with that forecast.

As the economy improves and folks start believing that it has, more people who have stopped looking for jobs will try to get back into the workforce. And when that happens, those newcomers will start showing up as unemployed in the Labor Department’s peculiar way of tabulating this figure.

So, at least at the beginning, the unemployment rate should rise if the economy gets better. That 3.6 percent prediction doesn’t seem to take that statistical quirk into account.

Please, please, let there be a deal on the federal budget before Friday’s midnight deadline.

Reports out of Washington are that the Republicans, Democrats and Trump (who looks like a Republican but doesn’t always act like one) are close on a $1.3 trillion budget that emphasizes domestic spending — including at least part of the cost of a new rail tunnel between Manhattan and New Jersey.

But that’s not why I want a bud- get signed. I think I speak for lots of people when I say: I’m tired of hearing about this.

Besides, the US government went an extra $1 trillion into debt between September and last week — so who is Washington kidding when our elected officials pretend to be carefully coming up with a budget?

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