A perfect storm for rising interest rates is on the horizon in the U.S. Unemployment is at a historic low of 4.1%, and with baby boomers retiring and immigration policies tightening, there’s no slack in the economy. U.S. tax cuts and a substantial reduction in quantitative easing (QE) domestically and abroad will push interest rates up. As a result, inflation is expected to grow, even though wages have failed to keep pace with economic expansion. Wage growth in core segments of the economy has only increased at a rate of 2.4% annually since 2006.
What kind of fiscal policy would benefit the U.S.economy? Given that we are already running up a major budget deficit, which will increase if we pass any more major spending bills on infrastructure, or border walls, the economy should slow once the Federal Reserve raises interest rates. The Fed has gone on record saying that it plans to increase rates throughout the year.
The Impact of U.S. Tax Reform and Quantitative Easing
Juicing the economy with tax cuts will also result in rising interest rates. Tax cuts passed at the end of 2017 should be financed by issuing more Treasury bills, especially if the economy doesn’t meet growth forecasts. Almost 50 percent of these Treasury bills are held by foreigners who would be loath to invest in a falling-dollar scenario, which will drive up the yields necessary for these to be sold.
In addition to U.S. tax reform, recent actions by both the Fed and European Central Bank (ECB) will result in rising interest rates. In the past six months, both institutions have taken sweeping measures to end QE. Such actions will place upward pressure on interest rates, and effectively compete with U.S. Treasuries.
The confluence of these factors – tax reform and a reduction in QE – will place downward pressure on the home ownership rate. This will increase the renter pool in the U.S., boding well for real estate investors, even though levered investment yields could decline. If real estate investing is on your radar, this may be a good time to get in before the inevitable rise in interest rates.