A sign of eco­nomic strength or a risk? Try both

The Denver Post - - BUSINESS - By Josh Boak

WASHINGTON» This week’s dizzy­ing sell­offs in the fi­nan­cial mar­kets have been a rude re­minder that the U.S. econ­omy is no longer re­ly­ing on ul­tra­low 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 se­cond­long­est 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.

For the mo­ment, Trump is con­tent to blame the Fed­eral Re­serve and its grad­ual rate hikes for the stock mar­ket fall. Thurs­day, the Dow Jones in­dus­trial aver­age fell 2.1 per­cent — or 546 points, af­ter hav­ing plunged 831 points Wed­nes­day.

Fed of­fi­cials last month raised the key short­term 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, for con­sumers and busi­nesses, 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 49­year 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 10­year 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.

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