Ahead of the Curve

CHAPTER 14

The Link Between Federal Deficits and Interest Rates

It has been my purpose throughout this book to provide a commonsense empirical methodology for business managers, investors, and others to use in tracking economic relationships as a means of forecasting. I have not offered specific conclusions on key economic policy issues. However, one hotly argued policy debate fits nicely into the ROCET approach of assessing economic cause and effect: whether fluctuations in the federal deficit, and the federal government borrowing that results from them, have a meaningful effect on interest rates.

This debate has been intense since 2002 because of growing concern that the federal deficit, which appears certain to reach record levels during the ...