Mulvaney says rising deficits could spike interest rates

White House budget chief Mick Mulvaney said Sunday that rising federal deficits could force interest rates to spike after President Trump signed a bipartisan budget deal with $300 billion in new spending.

Mulvaney told Fox News Sunday with Chris Wallace that the spending boost could drive up interest rates, but that the economic growth unleashed would eventually pay down the debt.

“If we can keep the economy humming and generate more money for you and me and for everybody else, the government takes in more money, and that’s how we hope to be able to keep the debt under control,” said Mulvaney, the director of the Office of Management and Budget.

{mosads}Mulvaney’s comments come as Wall Street frets over what an improving economy will mean for inflation and the Federal Reserve’s plans to raise interest rates. U.S. stocks plunged during a two-week sell-off before rallying on Friday to recover some of the losses.

Investors fear that rising wages and potential increases in inflation will prompt the Fed to raise interest rates.

The impact of Fed rate hikes and rising interest rates spurred by deficit increases could weaken the stock market after a boom in Trump’s first year as president.

“The Federal Reserve will have little choice but to raise short-term rates more aggressively, and the Fed tightening combined with the increased government borrowing will drive up long-term rates more quickly,” said Mark Zandi, chief economist at Moody’s Analytics.

“Lawmakers are doing the opposite of what economic textbooks suggest they should be doing.”

Republicans under Trump have shifted their approach to battling budget deficits. After demanding fiscal restraint under President Obama, the GOP passed a $1.5 trillion tax-cut package in December and approved last week a $300 billion increase in military and domestic spending.

Fiscal hawks and nonpartisan budget watchdogs criticized Republican leaders for what they consider a massive breach of responsible fiscal policy. Trump, defending the deal, tweeted that Democrats “forced” Republicans to add “waste” domestic spending to earn their support.

GOP leaders say the tax cuts will generate far more revenue than they’ll cost, and touted increases in military funding as essential to national security.

“We fundamentally changed the structure of the economy,” Mulvaney said. “This is not a fiscal stimulus. It’s not a sugar high.”

“We think we can change the long-term trends of our growth possibilities, the long-term trends of the economy.”