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Economist Mark Zandi On Why Tax Cuts Are Not A 'Game-Changer,' Rising Deficits, And Why He Is Not A 'Fan' Of President Trump’s Economic Policies

Steven Burke

Can you talk about the recent Federal Reserve interest rate increase and the impact you expect that to have on the economy?

The Fed rate increase was widely anticipated, and the Fed has laid out a plan for raising rates steadily through next year into 2020. Given that the economy is threatening to overheat with low unemployment that is declining and wage price pressure starting to develop, the Fed needs to normalize interest rates. So the Fed is now starting to work to slow growth. Since the recession it has all been about supporting growth— accommodative monetary policy, as they say. Now steadily but surely the monetary policy is going to become a restraint on growth as the Fed tries to slow the economy's growth rate so it doesn't overheat.

Do you agree with the rate hike?

I think the risk is that they are too slow—that they are not moving fast enough. If history is any guide, they need to be working a little more quickly here to normalize rates to take some of the steam out of the economy before it does overheat.

I do think asset markets are overvalued—stock prices are high relative to fair value; commercial real estate prices are high because cap rates are low; credit spreads in the bond market are thin. Even some housing markets are becoming a little overdone. So I think the Fed needs to be increasingly vigilant around asset markets that are overvalued. I think if anything they are a little slow here.

So you think the Fed needs to move quicker?

Right now, they are saying three rate hikes next year and one in 2020. My guess is when it is all said and done they'll have four rate hikes next year and one in 2020.

I am disagreeing on the margin. The risks for me are at a little bit different place than the average Fed number. I don't want to make too much of the disagreement. I think their policies are generally good ones.

Can you talk about the impact of the rate increase on the housing market and what you are seeing there?

Housing has obviously recovered significantly from the crash. In most places it has completely recovered, at least as measured by house prices. It is not quite there everywhere but almost everywhere.

So the market has found its way back. Most recently, however, it has kind of gone sideways. That reflects higher mortgage rates. Mortgage rates have risen since the tax cut. Also, the tax cuts themselves because of the elimination of various deductions that favor housing are starting to hurt housing demand and house price growth on places that heavily rely on those deductions like the Northeast, California and the Northwest. So there has been some cooling off. But in general, I think the housing market should hold its own. It should continue to be a modest source of growth.

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