Spiking rates causing anxiety
By Ken Moritsugu
Knight Ridder News Service
WASHINGTON — A sudden sharp rise in mortgage and other interest rates is triggering worries that further increases could snuff out — or at least slow down — a U.S. economic recovery.
Interest rates usually rise when the economy strengthens, and many analysts think the recent increase is in line with expectations of faster growth in the coming months. But if rates keep going up, they could nip any faster growth in the bud.
"Is the bond market short-circuiting the recovery?" asked Cary Leahey, a senior economist at Deutsche Bank in New York. "We're not going to know for two to three months."
The rate on the benchmark 10-year Treasury note continued to rise last week, finishing Friday at 4.4 percent, up from a low of 3.1 percent in mid-June.
Mortgage rates have followed. The rate for the average 30-year mortgage has shot up to 6.14 percent from 5.21 percent six weeks ago.
Higher interest rates tend to slow the economy by making it more expensive for individuals and businesses to borrow money. Usually, the momentum of a recovery is enough to overcome rising interest rates, but whether that holds in a hesitant or jobless recovery is unclear. The economy lost another 44,000 jobs in July, the Labor Department said Friday.
Still, interest rates remain relatively low, and the current ones aren't likely to kill any recovery, analysts said. The question is, will they keep rising?
"I think it is a worry," said Ian Morris, the New York-based U.S. economist for HSBC, a London-based bank. "We may not be in the danger zone just yet, but we can't be too far away."
The rise in interest rates hasn't dampened home sales thus far, but applications for mortgage refinancing have plunged 50 percent, according to a weekly survey of lenders by the Mortgage Bankers Association of America in Washington.
Refinancings are important to the economy because they provide people with cash to spend, either by giving them a lump sum payment or by lowering their monthly mortgage payments.
If rates go up more, that could cut into home sales. But many analysts think the momentum of an economic recovery will overcome the impact of rising interest rates.
That's the thinking at Centex Corp., a national homebuilder based in Dallas. Company chairman Laurence Hirsch said mortgage rates would have to rise another 0.5 to 1 percentage point before having an impact on business.
"We haven't seen anything ... that has put up any yellow warning signs at this point," he said, according to a transcript posted on the company's Web site.
Many analysts blame the sharp rise on a market overreaction to shifting signals from the Federal Reserve.
First, interest rates plunged in May and early June when Fed officials signaled heightened concern about the possibility of deflation. When the Fed started playing down those fears, rates shot back up.
The rates rose to where they would have remained without the Fed talk — the 30-year mortgage rate hovered in the 5.7 percent to 5.9 percent range this year until May — and then market psychology took them up a little more.
Once the market settles down, many analysts think, interest rates will ease slightly, then rise at a more manageable pace as growth picks up.
"I don't think the rise in interest rates is going to be enough to choke off the overall economic recovery," said Jay Brinkmann, the vice president of research and economics at the mortgage bankers group.
