The Fed’s Interest Rate Hike Underscores Need for Timely Action on Infrastructure Projects

Today the Federal Reserve announced the first interest rate hike in nearly a decade. The Fed is charged with the task of delicately balancing inflation, employment, and economic growth. Raising rates is positive news that the economy is continuing to rebound at a slow and steady rate. Similarly, most experts expect the Fed’s action to be slow and steady over the next year or so as long as the economy continues to improve.

So what does this mean for transportation infrastructure? When state or local governments initiate a new transportation project, they often issue bonds to finance the cost. Like consumers, governments pay interest to the lenders on the money they’ve borrowed. When interest rates go up, construction contracts become more expensive. Taxpayers wind up paying more for constructing and maintaining roads and highways.

The Producer Price Index (PPI), produced by the Bureau of Labor Statistics, measures average change over time in the selling prices received by domestic producers for their output. The PPI for construction of highways and roads has actually decreased in recent months, making this a great time to invest in transportation projects. However, the uptick in interest rates is likely to lead to an uptick in prices for the inputs to the construction process as well. Higher input prices further increase the total cost of highway and road projects. Fortunately, these price increases won’t happen overnight. But taking action sooner rather than later will save taxpayers’ money and get important projects underway while prices are still low in an historic context.

The upcoming New Year presents a renewed opportunity for our Governor and state legislators to prioritize spending, savings, and tax policies. Getting the best value for taxpayer dollars means that an investment now in transportation infrastructure will actually save money relative to deferring that investment to a later date. So as we ring in the New Year amidst higher interest rates and a modestly growing economy, we encourage our elected leaders to include highway funding in their budget proposals.

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