Economic Perspective: Why Have Interest Rates Jumped?

Mary Walden:

“Today’s program asks, ‘Why have interest rates jumped?” Mike, in recent weeks interest rates on long term loans, like mortgages, have taken a big leap. Of course, this makes it more expensive to buy big-ticket items, such as a car or truck.”

“For years, interest rates have come down. What’s the reason for their change in direction?”

Mike Walden:

“This has been a big change. We’ve seen, for example mortgage rates, go up by almost a half percentage point, between a quarter and a half percentage point, and they went just like that. I think the big reason is the election, the outcome of the election.”

“Now during the campaign both President-elect Trump and Secretary Clinton proposed changes in federal taxes and federal spending that would likely have meant the federal government was going to borrow more money.”

“The issue here, I think, is President-elect Trump’s proposals are much larger. He’s talking about big, big tax cuts. He’s talking about a big infrastructure package. Now we don’t know the details yet, and I think what’s happened here is the money markets are looking at his proposals and saying, ‘Alright he’s the President-elect. He’s probably going to propose something like what he said in the campaign.’ If these proposals go through it’s going to likely mean more borrowing in the money markets, and if you get more borrowing or credit you tend to see interest rates go up.”

“So this is a real good example of how markets, and financial markets, can move on anticipation of something happening. Now, very importantly, if as we go through 2017 and President-elect Trump, then President Trump, makes his proposals, and the Congress reacts, if the proposals that are ultimately voted on and passed are much more modest we could actually see interest rates go down. So this is a good example of the interaction between what the federal government wants to do and how the financial markets react.”