The Monday Moneybeat: Interest rates and federal debt

MARY REICHARD, HOST: Coming next on The World and Everything in It, the Monday Moneybeat.

NICK EICHER, HOST: Wall Street set three new records last week, after the chairman of the Federal Reserve all but promised to cut the cost to borrow money. That is to say, all but promised a cut in the so-called federal funds rate. 

This is not the rate you and I get when we take out a loan. 

Technically, the fed-funds rate is the interest rate at which banks and credit unions lend reserve balances overnight to other banks and credit unions. 

But it is the starting point for the way in which the market sets business and consumer interest rates, and it does have some impact on economic growth. It’s a debate how much or how little the impact.

The impact on the stock market was pretty significant, just the anticipation of lower rates, sent stock prices up: the Standard and Poor’s 500 index of stocks, the Dow Jones Industrial Average, and the Nasdaq all hit new record highs.

The S&P 500 cleared the 3,000 mark for the first time, up 8/10s of a percentage point on the week. The Nasdaq up a full percentage point, and the Dow a 1-1/2 percentage-point gain.

REICHARD: As to that Senate testimony by Fed Chairman Jay Powell: he again cited global economic uncertainties—specifically slow growth overseas and all the unknowns that might pertain to Britain’s exit from the European Union, so-called Brexit. And these things threaten American businesses.

POWELL: But we also see some weakness in the United States economy that I’ve mentioned: housing, manufacturing, trade.

Trade, that is, the trade dispute that’s still unresolved between the United States and China. 

For all those reasons, Powell stressed, the Fed seems unconcerned that a rate cut might spark inflation, because that, too, is under control. 

According to a Labor Department report last week, the Producer Price Index rose just one-tenth of a percent in June. This is a metric that measures inflation before it reaches consumers. 

And overall, the Consumer Price Index is below 2 percent year on year. If anything, Powell suggested more concern inflation wasn’t high enough, let alone too high.

POWELL: The bottom line is: the economy is in a very good place and we want to use our tools to keep it there. It’s very important that this expansion continue as long as possible.

EICHER: Powell also issued a warning about rising federal debts, and the long-term effects on restraining private investment and reducing productivity and economic growth.

On that score, Treasury Secretary Steven Mnuchin sent a letter to Congress last week asking for more leeway to issue more debt. Federal spending has gone through the metaphorical roof and the mechanism Mnuchin is asking about is the so-called debt ceiling. It’s now at $22 trillion and he says if it’s not raised, the United States is at risk of defaulting on its debt payment.

This year’s deficit is now about 25 percent bigger than last year’s. Numerous media reports blame the tax cut, but that’s not the reason: Federal tax receipts over the first 9 months of the current fiscal year are almost 3 percent higher than they were for the same period last year. What’s higher than tax collections are federal expenditures. They are up almost 7 percent.

About the debt ceiling: at $22 trillion, that’s more than what the U.S. economy produces in a single year. That number is a little more than $21 trillion.

And that is today’s Monday Moneybeat.

(AP Photo/Charles Krupa, File) This June 15, 2018, file photo shows U.S. currency on a counter in East Derry, N.H. 

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