If You Are Afraid of Higher Interest Rates Worry about Infrastructure Spending

The U.S. interstate highway system is 50 years old this year and starting to show its age. Every year or so a major bridge falls down.  And citizens of cities like Flint,   Michigan are sick because of defective water treatment facilities. One of the few points of agreement in this year’s nasty presidential election campaign is that U.S. infrastructure is in need of a major overhaul. The bottom line for Forex traders is that fixing all of those highways and bridges will likely result in a higher interest rate and stronger dollar. But first let’s look at what needs to be done.

Infrastructure Report Card

The American Society of Civil Engineers issues an American infrastructure report card. Here are some of the high points.

Using a simple A to F school report card format, the Report Card provides a comprehensive assessment of current infrastructure conditions and needs, both assigning grades and making recommendations for how to raise the grades. An Advisory Council of ASCE members assigns the grades according to the following eight criteria: capacity, condition, funding, future need, operation and maintenance, public safety, resilience, and innovation. Since 1998, the grades have been near failing, averaging only Ds, due to delayed maintenance and underinvestment across most categories.

Now the 2013 Report Card grades are in, and America’s cumulative GPA for infrastructure rose slightly to a D+. The grades in 2013 ranged from a high of B- for solid waste to a low of D- for inland waterways and levees. Solid waste, drinking water, wastewater, roads, and bridges all saw incremental improvements, and rail jumped from a C- to a C+. No categories saw a decline in grade this year.

The 2013 report card estimated that $3.6 Trillion would be needed by 2020 for upgrades. Categories that need improvement and their grades are these.

Energy, D+

Schools, D

Public Parks & Recreation, C-

Transit, D

Roads, D

Rail, C+

Ports, C

Inland Waterways, D-

Bridges, C+

Aviation, D

Waste Water, D

Solid Waste, B-

Hazardous Waste, D

Drinking Water, D

Dams, D

The consensus seems to be there to start fixing U.S. infrastructure. Interest rates are low so that long term borrowing would be cheap by historic standards and putting people to work on fixing things would be good for the economy. But how does this affect interest rates?

Budget Increase Likely to Result in Higher Interest Rates

Bloomberg reports that if the new president ups the budget the Fed is likely to raise rates.

The Federal Reserve is inclined to raise interest rates higher than otherwise if the next president pursues a more stimulative fiscal policy.

U.S. central bankers say they would welcome such a step as shifting some onus for supporting the economy away from the Fed. But they suggest they would offset the extra demand that a bigger budget deficit would spur by making monetary policy less stimulative.

The reason: With the economy already operating close to capacity, it’s not in need of an added boost right now.

“If we have more expansionary fiscal policy, we don’t need as expansionary a monetary policy,” Federal Reserve Bank of Boston President Eric Rosengren said in an Oct. 15 interview.

In short a major overhaul of U.S. infrastructure would be a great way to further stimulate the U.S. economy. The result would also be more inflation. The Fed’s job is to fight or prevent inflation so if you are afraid of higher interest rates worry about infrastructure spending.