Prof: Fed rate hike has taxpayer implications

(The Center Square) – The Federal Reserve board’s recent decision to raise interest rates a quarter point may have expensive implications for Illinois taxpayers.

Professor Justin Marlowe, director of the Center for Municipal Finance at the University of Chicago’s Harris School of Public Policy, said state and local governments are already borrowing at higher interest rates because of their relatively low credit ratings and concerns about their long-term financial sustainability.

“Increasing interest rates make that problem worse. It makes it that much more expensive when cities and counties and school districts in the state have to go out to borrow money to finance infrastructure projects,” Marlowe told The Center Square.

Illinois has the lowest credit rating of any U.S. state.

Marlowe said the Fed’s interest rate hikes are eventually priced into the rates we all pay, including governments.

“Ultimately, that is more money out of the pockets of taxpayers, so all these things affect regular people in lots of important direct and indirect ways,” Marlowe said.

Marlowe said the Fed signaled its thinking that the economy is strong enough to support the rate increase.

“They're clearly focused now on trying to address inflation, and there's a good chance that we'll see at least one or two more rate hikes in the not-too-distant future for exactly that reason,” Marlowe said.

Marlowe said the move has important implications in Illinois.

“When you think about particularly things like diesel prices, which have been a huge driver of inflation, according to all of the data, a rate hike like this is designed in many ways to try to address those kinds of rising prices,” Marlowe said.

Marlowe said it would be ideal if there were cooperation from the fiscal policy side on taxing and spending.

“If the Trump administration or just the message coming out of D.C. in general is contradictory to the message that the Fed is trying to send or it undercuts or weakens or dilutes the message that the Fed is trying to send, that really takes away one of the Fed's main tools to try to affect the economy,” Marlowe said.

Marlowe said presidents have “jawboned” the Fed for years, but it’s much more pronounced in the current environment.

Brett Rowland and Morgan Sweeney contributed to this story