Interest Rates Since December 16

Yesterday Ben Bernanke offered a thoughtful discussion of fiscal policy that opens with:

Markets have responded strongly to Donald Trump’s election victory, pushing up equities, longer-term interest rates, and the dollar. While many factors influence asset prices, expectations of a much more expansionary fiscal policy under the new administration—higher spending, lower taxes, and larger deficits—appear to be an important driver of the recent market moves.

FRED provides the data on 10-year government bonds both in terms of nominal rates and real rates. Between the election and December 16, nominal rates rose by 80 basis points, while real rates rose by 60 basis points. This increase was indeed attributed to an expectation of fiscal stimulus from Team Trump. But notice over the past four weeks, interest rates have started coming back down. Why? Paul Krugman follows up on Bernanke’s post with this:

Let me be less gentle: there will be no significant public investment program, for two reasons. First, Congressional Republicans have no interest in such a program. They’re hell-bent on depriving millions of health care and cutting taxes at the top; they aren’t even talking about public investment, and would probably drag their feet even if Trump came forward with a detailed plan and made it a priority. But this then raises the obvious question: who really believes that this crew is going to come up with a serious plan? Trump has no policy shop, nor does he show any intention of creating one; he’s too busy tweeting about perceived insults from celebrities, and he’s creating a cabinet of people who know nothing about their responsibilities. Any substantive policy actions will be devised and turned into legislation by Congressional Republicans who, again, have zero interest in a public investment program. So investors betting on a big infrastructure push are almost surely deluding themselves.

It seems the initial market euphoria over a Trump fiscal stimulus has started to fade as we watch the clowns that Trump is appointing as his key economic advisors.