Rate hike fodder for Bush, Kerry camps

CBS MarketWatch

June 30, 2004 Wednesday

SECTION: NEWS & COMMENTARY; ECONOMY AND POLITICS

Rate hike fodder for Bush, Kerry camps

by William L. Watts, CBS.MarketWatch.com; mailto:bwatts@marketwatch.com ; William L. Watts covers Congress and politics for CBS.MarketWatch.com. Corbett Daly contributed to this report.

WASHINGTON (CBS.MW) — Even before the Federal Reserve followed through on long-held expectations for a rate hike, aides to President Bush and Democratic challenger John Kerry argued over what the move said about the economy.

While presidents usually refrain from commenting on Fed moves, White House spokesman Scott McClellan said Wednesday morning that the hike by the policy-setting Federal Open Market Committee is another sign of a reinvigorated economy.

"It's not unexpected that, as the economy continues to grow stronger, that interest rates may rise some, and that's not something at this point that is a concern," McClellan told reporters. "It's a reflection that the economy is growing stronger."

Democrats said the Bush administration is glossing over problems in the economy and the threats posed by higher rates.

In a statement, Kerry economic adviser Gene Sperling said the candidate wouldn't comment directly on a Fed policy move, but said the action underscored the campaign's contention that "George Bush's abandonment of fiscal discipline will mean higher long-term interest rates, less sustainable economic growth and more debt passed on to our children at a time when Social Security and Medicare are facing increasing challenges."

Democratic National Committee spokesman Jano Cabrera fired the first shot Tuesday, issuing a statement accusing Bush of emphasizing favorable economic statistics while ignoring the potential pain caused by higher interest rates amid high credit-card debt levels.

Republicans said Democrats were stretching to find economic pain amid an onslaught of good news. GOP pollster Ed Goeas said the advent of interest-rate hikes might actually underline to voters that economic growth is gathering steam.

"If [some voters] don't notice 300,000 new jobs month after month… and they don't' notice that disposable income is at a high rate and the growth rate is the highest in 20 years, maybe this will in a very strange way be a reminder that, yes, the economy is picking up," Goeas added.

Credit-card debt hit a record $750.9 billion as of April. Total household debt, which includes home mortgages, car loans, credit-card debt and other loans, totaled $9.4 trillion as of the first quarter, a rise from $5.5 trillion seven years ago, according to Fed data.

An interest rate hike could act as a "depressant," especially among senior citizens, who have accumulated more credit-card debt than usual, Democratic pollster Celinda Lake said.

Fed officials, however, have downplayed the impact of expected rate hikes on consumers.

A "minority" of consumer debt is at floating rates, Philadelphia Fed Bank President Anthony Santomero noted in an interview with BusinessWeek this week.

"The household balance sheet is in pretty good shape. It has accumulated some additional wealth as a result of the surge in homeownership and refinancing," Santomero said.

Impact on the deficit debate

The federal government's balance sheet may be another story.

Wednesday's rate hike in itself won't have much effect on the budget outlook. Official projections assume that interest rates will rise from current levels.

But if the central bank is forced to move rates more than expected, higher interest rates will push the costs of borrowing to fill the budget gap higher.

A more likely possibility, however, is that the Fed's tightening could renew scrutiny of the relationship between deficits and interest rates, according to Stanley Collender, managing director of Financial Dynamics and a longtime budget watcher.

If business leaders and voters determine that reining in the deficit would help slow down or curtail policy tightening by the Fed, "it might focus attention on the budget in a way that hasn't happened in the last couple years," Collender said.

The federal budget posted surpluses for four consecutive fiscal years from 1998 to 2001. The Congressional Budget Office baseline estimates issued in 2001, which serve more as markers of the nation's fiscal position rather than forecasts, projected surpluses would total $5.6 trillion in the following decade if spending and revenues continued to grow at trend levels.

But the budget slipped back into the red in 2002, and the CBO's latest baseline projections foresee cumulative deficits of $1.893 trillion between 2005 and 2014.

Democrats and Republicans have been trading blame over the shift back to red ink since the beginning of the Bush administration. The GOP places the blame on the implosion of the stock market bubble, the 2001 recession and the aftermath of the Sept. 11 terror attacks. The 2001 and 2003 tax cuts added to the deficit in the short run, but minimized the economic downturn and have set the stage for long-term growth, Bush has argued.

Democrats say that Sept. 11 and the stock market bubble were factors, but contend the key culprit were tax cuts that were skewed too heavily toward wealthy Americans and did little to boost growth.

Both Bush and Kerry say their economic plans will halve the deficit within the next half-decade, but neither candidate has made deficit reduction a centerpiece of his campaign. Bush, meanwhile, has promised to fight for permanent extension of his tax cuts, while Kerry has proposed an expensive health-care program.

Risks of tightening

Bruce Bartlett, a fellow with the conservative Center for Policy Analysis, worries that as the Fed begins its tightening cycle from a "ridiculously low interest-rate situation," there is significant potential for some kind of financial crisis to emerge.

Such a crisis could eventually force Congress into not only squelching tax cuts, but also pondering tax hikes as part of a major package aimed at convincing the markets it intends to manage the deficit.

Bartlett told a Brookings Institution forum last week that Bush would likely resist efforts to raise taxes. But he warned that the expensive Medicare drug benefit signed into law last year and a lack of spending restraint may allow for little flexibility in the face of a crisis.

"We're just in the calm before the storm," Bartlett said. "I don't know when the storm is going to hit, but I know it's coming."