Why The Fiscal Cliff Deal Could Lift Interest Rates
The budget deal also failed to address the country's debt limit, which sets up another confrontation between Democrats and Republicans within a couple of months. Between that and the fact that the fiscal cliff's spending cuts have only been delayed rather than cancelled, it means that the economy may yet have to withstand some level of spending cuts.
The impact on interest rates
Because the budget deal leaned more toward economic stimulus rather than deficit reduction, it could help reverse the trend that has seen interest rates decline drastically over the past few years. That's bad news for potential borrowers, but good news for depositors who have seen interest on their savings accounts and other deposits all but disappear.
Anything that stimulates the economy has the potential to increase the demand for capital, which creates upward pressure on interest rates. It could also help bring unemployment down, which would hasten the day when the Federal Reserve can back off on its current policy of active intervention to lower interest rates. In addition, because the deal looks like it will add to the deficit problem, it may raise credit concerns, which would also contribute to higher interest rates.
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