Interest Rates Likely to Rise, Says Economics Professor - Garrett Tells Mortgage Bankers of Education's Impact

www.chattanoogan.com Irby Park posted February 25, 2003

Four things impacting interest rates have been perfect for low rates for the past nine years, but major changes could put upward pressure on rates in the next year to year and a half, said John Garrett, UTC Foundation professor of economics.

Speaking at the monthly luncheon of the Mortgage Bankers Association (MBA) of Chattanooga at The Loft, he cited the vital role education plays in economic development and then turned to a discussion of four things that impact interest rates.

The four, he explained, are monetary policy determined by The Fed and Chairman Alan Greenspan, fiscal policy of the government including what the government is spending and how much they’re borrowing, inflation which he described as “a real wild card” and the international value of the dollar.

“The economy doesn’t like it when the federal government goes from a big deficit to a big surplus,” the economics professor stated. With the government depressing the economy, he continued, The Fed kept lowering interest rates to stimulate the economy.

At the same time, the dollar was overvalued and attracted lots of overseas capital. The inflation rate dropped to 0.1 percent and was trending downward. With interest rates low and the economy prosperous, “it can’t get any better than this,” he said.

But in the last few months, the federal government has gone from a $200 billion-plus surplus to a $307 billion deficit in the fiscal year ending in October. This, he said, will “definitely exert upward pressure on interest rates” and push the economy up, stimulating inflation.

But the impact of these factors, he added, will likely be a year to a year and a half away. While looking at some of the things that can determine trends, he emphasized that it is “impossible to predict interest rates. Anytime you say it is going to be higher or lower next week, you have exactly a 50-50 chance” of being right.

However, looking at the various factors, it is possible to get a good idea of the long-term trends over the next few years.

While discussing government and fiscal factors impacting the economy, he said, “Lots of people have said lots of things about economic development in Chattanooga. I’ve watched them hire out-of-town consultants to do study after study and spend good money that really doesn’t return a lot.”

He said there is an abundance of economic literature that can provide help in planning economic development. One thing that stands out as a contributor to economic development is education.

“You get education right and your economic development comes automatically,” he said. He emphasized the need to get higher education right, and “not only higher education, but graduate education.”

Chattanooga, he said, is one of 256 recognized statistical metropolitan areas the federal government keeps track of and Chattanooga is in the bottom 2 percent in the number of college places available.

The labor force, he added, is in the bottom 10 percent in the number of college graduates in the local work force. UTC, he continued, does a fine job, but Chattanooga is not growing because the state is not putting the money into education here as much as in other areas of the state.

Chattanooga leaders, he said, don’t seem to recognize the relationship between education and economic development.

To produce a college graduate, he stated, costs $40,000 in state money. That graduate, over a lifetime, will realize increased earnings of about $3 million.

In discussing economic trends, inflation and interest rates, he described inflation and the value of the dollar as “wild cards” in determining interest rates.

Every year since 1983, he said, this country has built more international debt. The world loaned us trillions of dollars because the dollar was considered safe and “we pay back our debts with interest.” Foreign countries bought bonds and other U.S. assets.

However, it the dollar looks like it is getting weak, investors will move their investments to overseas markets. Money will flow out and the value of the dollar will drop.

This country for the past year has a $500 billion trade deficit. “Every year we set a new record,” he added. No one has ever had a trade deficit as big as the U.S. has had in the past four years.

Inflation couldn’t be any better than the present 0.1 percent, but gas prices are going up. Part of the gas price rise is blamed on problems in Venezuela, he said, but it is nothing compared to what will happen in case of war.

He said he heard one economist “guesstimate” that without a war the federal deficit could hit $450 billion, pushing the economy up and prompting The Fed to raise interest rates to combat inflation.

But he emphasized that there are a lot of factors that impact the economy and it’s impossible to predict what is going to happen with any accuracy.