Why prospect of higher budget gaps is spooking stock market


WASHINGTON — The stock market may be firing off warning shots to the Trump administration and Congress about their plans to blow up the size of the federal deficit.

The anxiety that has gripped the market this week appeared to escalate Thursday just as President Donald Trump and lawmakers were setting the government up for annual budget deficits that would routinely exceed $1 trillion. The higher that deficits rise, the more likely it is that interest rates will surge, too, and undercut corporate profits, stock prices, consumer spending and the overall economy.

A two-year budget accord that was forged early Friday ended a brief overnight government shutdown. But the additional spending the accord contains, coming soon after Trump signed into law sweeping tax cuts, are raising alarms about high deficits and potentially higher borrowing rates. Stocks turned choppy afterward amid fierce trading.

On Friday, the rating agency Moody’s concluded in a report that the federal government’s “balance sheet is set to deteriorate,” in large part because the tax cuts will amplify the debt pressures caused by other expenses and potentially higher interest costs.

Administration officials have downplayed the risk of simultaneously slashing taxes and boosting spending, arguing that the result will be faster growth that will then shrink the debt. But the higher deficits would come just as the Federal Reserve is on course to continue — and perhaps accelerate — the pace of its short-term rate hikes. The Fed’s rate increases will likely lead, in time, to higher borrowing rates for consumers and businesses and likely slow economic growth.

One tenet of modern economics has been that the government should run higher deficits during a recession to help the economy heal but then reduce those deficits when the economy is relatively healthy, as it is now.

The market’s plunge over …read more

Source:: The Mercury News – Business

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