Mick Mulvaney, the White House budget director on Sunday stated that rising federal deficits might force interest rates to spike after President Donald Trump signed the bipartisan budget deal with $300 billion in new spending.
Mulvaney said to Fox News reporters that the spending boost could drive up interest rates, but that the economic growth unleashed would eventually pay down the debt.
“If we can keep the economy humming and generate more money for you and me and for everybody else, the government takes in more money, and that’s how we hope to be able to keep the debt under control,” Mulvaney said.
According to The Hill, investors fear that rising wages and potential increases in inflation will prompt the Fed to raise interest rates. With that, the impact of federal rate hikes and rising interest rates spurred by deficit increases could weaken the stock market after a boom in Trump’s first year as president.
“The Federal Reserve will have little choice but to raise short-term rates more aggressively, and the Fed tightening combined with the increased government borrowing will drive up long-term rates more quickly,” said the chief economist at Moody’s Analytics, Mark Zandi.
“Lawmakers are doing the opposite of what economic textbooks suggest they should be doing.”
Meanwhile, nonpartisan budget watchdogs condemned the Republican leaders for what they consider as a massive breach in responsible fiscal policy. Trump defended the deal on Twitter saying that the Democrats “forced” Republicans to add “waste” domestic spending in order to earn their support.
The Hill reported that the GOP leaders say the tax cuts will generate far more revenue than they’ll cost and touted increases in military funding as essential to national security.
“We fundamentally changed the structure of the economy. This is not a fiscal stimulus. It’s not a sugar high,” Mulvaney said. “We think we can change the long-term trends of our growth possibilities, the long-term trends of the economy.”