Why Interest Rate Risk is On The Rise

November 15, 2016 at 7:23 am 2 comments

fredgrfredgraphaph Look at the rising rate being offered to purchasers  of the ten year treasury bond since November 8t,h 2016 and it’s clear that, far from triggering a flight to safety as  prognosticators predicted, many investors expect the economy to get an immediate and positive jolt from the Trump presidency.  You see a similar trend with the Dow Jones Industrial Average.

What’s going on is the first direct impact that Donald Trump’s presidency is having on your credit union. A good argument can be made that these rising rates reflect, in part, early speculation about the size and scope of a fiscal stimulus the likes of which this country hasn’t seen since, at least, the early eighties. It’s time to start  dusting off all those NCUA warnings about interest rate risk.

President-elect Trump and Hillary Clinton both agreed on the need for large investments in our nation’s roads and bridges and airports but disagreed about how much should be spent and how it should be funded.  Trump  argues on his website that he would  “Transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains with a deficit-neutral plan targeting substantial new infrastructure investments.”  He has said that  he would double Clinton’s proposed $275 billion on infrastructure spending over five years. Remember, unlike President Obama, he has both the Senate and House on his side — he’s going to get at least some of what he wants.. Combine his pledge on infrastructure spending with  his pledges to increase  military spending and dramatically reduce corporate and personal tax rates and what you have is a stimulus on  steroids. .

The sudden likelihood that Congress will spend money means that the Federal Reserve has effectively been looking out over the economic horizon through the wrong end of the telescope. Fed Officials have grumbled for years that Congress has not done enough to support economic stimulus.  Now the question is not whether or not to raise interest rates, but by how much and how quickly.  Remember we will be stimulating an economy with low unemployment and moderate wage growth.

Entry filed under: General.

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2 Comments Add your own

  • 1. Anonymous  |  November 15, 2016 at 8:14 am

    I’ll be interested to see how they propose to pay for these infrastructure projects when for the last 8 years Congress has been so set against deficit spending. Coupled with tax cuts and other increases in spending I’m unsure how this will be economically feasible. Unlike a business the US government is not able to go bankrupt.

    Reply
    • 2. Henry Meier  |  November 15, 2016 at 9:34 am

      It brings me back to the days when I was learning about conservatism. One school within the republican party wasn’t that concerned with deficits, believing that increased stimulus would more than offset negative deficit consequences.(Jack Kemp) Another view, more common today with some bipartisan support is that deficits are a mortal danger that must be dealt with (e.g. Gramm–Rudman–Hollings Balanced Budget Act). This is where you will see the biggest fault line in the Trumpican Party

      Reply

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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