Forget Trade Wars. INTEREST RATES Are The Real Danger To The Economy

higher interest rates Shutterstock/Jim Vallee

Joanne Butler Contributor
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While the Trump administration is primed to retaliate against the People’s Republic of China (PRC) for under-pricing their steel exports to America, we don’t have to worry about that now. What will hit your wallet is the rise in interest rates. If you haven’t refinanced your mortgage yet — that window is closing. Likewise, those zero-interest rate deals on credit card debt transfers are about to die.

Why are interest rates going up? Easy answer: the Federal Reserve’s Open Market Committee has decided to print more money.

Look at a dollar bill. On the bottom of its front are the words “Federal Reserve Note”.

When the Federal Reserve prints more money, it pushes up prices, as consumers (hopefully) have more money to spend.

Other reasons include making corporate bonds more attractive to investors by providing a higher rate of interest income. In my opinion – fused in those ugly days of double-digit ‘stagflation’ – this is a weak reason. The problem is the higher interest income will be paid in future dollars that will have less purchasing power than they do today.

Another reason involves financing the federal debt. According to the U.S. Treasury, our current debt is $21 trillion, with $15.4 trillion ‘held by the public’. The ‘public’ includes your grandma and her Savings Bonds to the PRC and their purchase of various U.S. Treasury financial products.

The Federal Reserve wants more buyers for those products – to finance our debt. And, as with corporate bonds, the eventual payout from a Treasury product will be in dollars that are worth less than now.

On March 21, when Jerome Powell became chair of the Federal Reserve, the Open Market Committee met and interest rates went up. Two more hikes may expected later this year, if the economy continues to grow.

Granted, the new interest rate remains below two percent, but a rate rise has a waterfall effect in the financial community. Mortgage and other loan rates (cars, home equity) will go up. As mentioned previously, credit card companies will adjust their balance transfer deals accordingly.

With Tax Day (April 16) just around the corner, I suggest that once readers file their taxes, they take a hard look at their debt situation.

Further, if you have a major purchase on the horizon, you may save money via a lower interest rate if you buy now, instead of waiting until after August 1, as it’s likely the Federal Reserve will raise rates during its summer meeting (full schedule here).

They’ve got a November meeting scheduled too – when a third rate increase for 2018 could occur.

Consider yourself warned. Borrowing costs for everyone are going up this year. If you’ve forgotten to refinance your mortgage, or need to borrow money for any reason – if you can afford it – grab that credit deal before it’s gone.

And let President Trump worry about the tariffs.

Joanne Butler is a graduate of the Kennedy School at Harvard, was a professional staff member (Republican) at the House Ways and Means Committee, and served in President George W. Bush’s administration. The Ghanaian poet, Kwesi Brew, has described her as ‘vibrant.’

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.