Higher rates are both a sign of US economic might, risk to it

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 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 now 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.

For the moment, Trump is content to blame the Federal Reserve and its gradual rate hikes for the stock market fall. 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, 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 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.