NEW YORK–Two economic indicators that are performing in ways not seen before could mean a significant jump in interest rates lies ahead, suggests one new analysis.
The U.S. budget deficit and unemployment rate are heading in opposite directions — something that's never happened during post World War II peacetime, according to Goldman Sachs.
Goldman Sachs is projecting that the 10-year Treasury note could be yielding 3.6% next year, a projection of interest to every credit union as it prepares for 2019.
The federal government deficit has surged following the $1.5 trillion tax cut approved in December 2017 and the $1.3 trillion spending bill aimed at keeping the government operating through the end of the fiscal year. The budget deficit stood at $668 billion in 2017 and the Congressional Budget Office is projecting it will top $1 trillion by 2020.
The most recent unemployment numbers show unemployment at a low 3.9%.
In its analysis, Goldman Sachs said those types of moves would typically come in the early stages of an economic recovery, but the U.S. economy is now in the eighth year of its post-financial crisis expansion.
Goldman Sachs noted that the only times since World War II that the deficit has risen while unemployment has fallen was during the Korean and Vietnam wars.
Goldman pointed out that in order to meet the growing debt load, the U.S. will have to issue more bonds at a time when the Federal Reserve is no longer a player in the market. But more supply and fewer buyers will mean the government will have to pay investors more to buy U.S. debt.
‘A Striking Departure’
Goldman said it is specifically projecting the benchmark U.S. Treasury note will be yielding 3.6% by the end of 2019.
"The sizeable demand boost provided by the recent deficit-increasing tax cuts and spending cap increases at a time when the economy is already somewhat beyond full employment is a striking departure from historical norms that is likely to contribute to further overheating this year and next and tighter monetary policy in response," Goldman economists Daan Struyven and David Mericle said in a report for clients. "The unusual increase in the deficit is even more surprising because it comes at a time when the federal debt-to-GDP ratio is already approaching historical highs. The resulting increase in Treasury issuance will require the public to absorb considerably more government debt in coming years."
The current U.S. debt currently stands at approximately $21 trillion.