Will Obama Administration Push Up Long-Term Interest Rates?

President-Elect Obama has outlined an ambitious economic stimulus program involving government spending on infrastructure and government hiring. This multi-billion dollar spending program will be on top of the billions to still be spent with the ongoing government bailout of financial companies. While a majority of economists have approved the plan as prudent, a number have questioned the impact on longer-term interest rates. Government borrowing is accomplished through the issuance of Treasury Bills, Treasury Notes, and Treasury Bonds. If the buyers of these bonds, namely foreign countries, become worried about inflation prospects in the United States or even a possible credit downgrade on U.S. debt, they may then demand higher yields to compensate. Higher Treasury yields could push up mortgages rates and other borrowing rates tied to Treasury yields. The threat of higher long-term interest rates is one reason that many financial advisers believe that refinancing at today’s historically-low fixed mortgage rates may be a better alternative than waiting for the possibility of even better rates down the road.

The unintended consequence of higher long-term interest rates from the Obama administration’s economic plan is of less importance than the critical loss of jobs, wealth, and confidence in the United States. However, Americans should pay attention to their exposure to higher long-term rates either in their investments or in their loans.