As the reality of normalizing monetary policy increases, Utah may feel the impact of rising interest rates and should ensure that its infrastructure investments are on a healthy timetable for completion.
The World Economic Forum convened last week in Davos, Switzerland, where the sensitivity of world financial markets was on full display as U.S. Treasury Secretary Steven Mnuchin’s comment about a weak dollar spurred speculation regarding the rate of monetary policy normalization in the U.S., sending currency markets into a frenzy for several days.
When the Great Recession of 2008 first gripped world markets, central banks around the globe, led by the U.S. Federal Reserve, took extraordinary measures to stabilize and prevent a global meltdown of financial markets. They lowered interest rates to near zero percent and added more dollars to the money supply. Only now, some 10 years later, are global markets viewed to be strong enough for central banks to begin reversing these emergency measures. This process is referred to as monetary policy “normalization.”
Why should Utah care?
Utah is experiencing positive sustained growth during the early stages of this normalization process, and it looks like the growth will only continue. Whether the impact of normalization in Utah will be positive or negative depends on decisions being made currently by elected officials across the state.
The primary feature of normalization is raising interest rates and reducing the amount of debt held by the Fed. Should interest rates rise, borrowers will find it harder to get loans, and they will pay a higher price for them.
The high rate of job growth in Utah has been appropriately lauded as a great achievement for the state. However, the simultaneous rapid rise in housing prices is clear evidence that the growth of housing and transportation infrastructure has seriously lagged behind the rate of job growth. In order to sustain its rapid job growth, Utah will have to dramatically increase its investment in housing and transportation infrastructure — two of the most debt-intensive endeavors in any economy — and the state will have to do so during a period of rising interest rates.
If the current shortage of affordable housing and transportation infrastructure is allowed to continue in an environment of rising interest rates, the combination could quickly eliminate any economic advantage for companies to relocate their operations to Utah. Failure to make this investment will cripple Utah’s ability to sustain its celebrated growth rate.1 comment on this story
In a rising interest rate environment, the longer these projects are delayed, such as building the new prison, expanding the airport and investing in affordable housing, the more expensive they will become. Delayed long enough, there could be no appetite to make the investment at all.
But there are some countervailing positives to this bleak outlook. The decision to relocate the prison, with the subsequent convening of the Point of the Mountain Development Commission, provides an opportunity to relatively quickly rebalance job growth and infrastructure expansion. Moving forward with an appropriately urgent timetable will help ensure new infrastructure projects offer the return on investment that the state deserves.