So says U.S. Treasury Secretary John Snow, following up on his July comment that the U.S. economy was “coiled like a spring.” That’s a nice line for the economic cheerleaders, though I suspect most job seekers have yet to feel a bounce from the alleged uncoiling.
But the comments Snow made which will draw the greatest attention are those regarding U.S. interest rates:
AMERICAN interest rates are set to rise over the next few months, one of President Bush�s most senior officials told The Times this weekend.
However, far from being a dampener on the economy, John Snow, the US Treasury Secretary, said that Washington would welcome such a move because it would underline the strength of the country�s growth prospects.
. . .
Asked about the impact of such rapid growth on interest rates, Mr Snow said: �Interest rates are the price of capital. As profits increase, there is going to be a need for a capital-rationing process.
�I�d be frustrated and concerned if there were not some upward movement (in rates).� He rejected the widely held view on Wall Street, that the Fed never raises interest rates before a presidential election. �It is amazing how you get this sort of mythology without any factual backing,� he said.
The article states that Snow “refrained from discussing monetary decisions, which are left to the Federal Reserve Board.” But the article is somewhat ambiguous on whether Snow was speaking merely about the direction of interest rates, or also about monetary policy. If the outlook was on the latter, says Brad DeLong, it’s misguided for three reasons:
(1) The Federal Reserve might not follow the prediction, leaving the forecaster out on a limb;
(2) If the forecast turns out to be true, it appears as if the Fed isn’t truly independent and may be succuming to political pressure; and
(3) The comments might undermine current Fed policy.
It will be interesting to see how this plays out in the bond market, which has already experienced tremendously volatility over the past several months.