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.
Given the American economy’s new-found strength, Mr Snow said he would be “frustrated and concerned” if there were not some upward movement in rates. Expectations of tighter US monetary policy began to take hold on Wall Street last week after speeches from two senior Federal Reserve officials, which drew attention to the exceptionally wide gap between today’s low interest rates and the US economy’s booming growth rate.
However, Mr Snow’s comments, in an exclusive interview with The Times, offer the clearest sign so far that the US interest rate cycle is turning.
While Mr Snow refrained from discussing monetary decisions, which are left to the Federal Reserve Board, his comments implied that the Bush Administration was preparing for much higher rates in the election year ahead — in contrast with Wall Street, where many leading banks are still predicting that there will be no tightening of monetary policy until 2005.
Mr Snow, referring to his previous Times interview in July when he described the US economy as “coiled like a spring”, joked: “The spring has now sprung.”
The estimates of private economists, based on recent consumption and output figures, suggest that the US economy may have grown by up to 7 per cent in the third quarter. Although Mr Snow did not endorse these estimates, he said that growth in the year ahead would be about 4 per cent and would “produce loads of jobs”. Referring to the rule of thumb that the US must generate 200,000 jobs a month to cut unemployment, he noted that 4 per cent growth would “translate into roughly two million new jobs from the third quarter of this year to the third quarter of 2004 – that’s an average of about 200,000 a month”.
He added, “I would stake my reputation on employment growth happening before Christmas. I’d bet dollars to doughnuts that we’re going to see a pickup in jobs in the next few months.”
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.
Questioned on the dollar, Mr Snow said that the US policy had been misunderstood by many commentators, although not by the markets themselves. The dollar fell sharply in the month after a statement issued in Dubai by Group of Seven ministers, which called for “greater flexibility” in exchange rates. He had hailed this statement as “a milestone” and this comment was widely interpreted as a hint that the US wanted to see the dollar decline.
Mr Snow said the milestone he had referred to was the commitment of all the G7 countries to stimulate domestically led growth. The US had never intended to talk the dollar down against other currencies, whose exchange rates were set by the market, he said.
