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Surge in Rates May Hurt Pillar of the Economy
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| Parent(s) |
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| Contributor | RP |
| Last Edited | RP Aug 05, 2003 06:19pm |
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| Category | Analysis |
| Media | Newspaper - New York Times |
| News Date | Monday, August 4, 2003 06:00:00 AM UTC0:0 |
| Description | If cheap mortgages have kept the economy afloat, the economy may have just sprung a leak.
A little more than a month after the Federal Reserve reduced its overnight lending rate to just 1 percent, mortgage rates have shot up as investors have soured on the bond market — in part because of confusion about the Fed's intentions in managing the economy.
This has abruptly stalled plans by thousands of homeowners to refinance their houses at even lower rates than they already enjoy. The pace of home loan refinancing has fallen by half the last several weeks, according to bankers and analysts.
If the higher rates persist, they will make it more expensive for people to buy houses or to borrow money against their houses to pay for renovations, furniture and even cars. That would damp a principal source of consumer demand over the last two years, a period when consumer spending has been one of the few sources of economic growth.
Higher rates could also lead to more expensive loans for automobiles; robust car sales have been another pillar of the economy the last few years.
Businesses, meanwhile, still gun shy about spending money on new factories and equipment, may have to contend with higher borrowing costs as well. So will the federal government itself, just as tax cuts and spending increases are forcing it to borrow huge sums to cover the largest deficits in history. |
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