WP: A Nation Chained to (Interest) Rates

[DeepModem Mom]

A Nation Chained to Rates
As Borrowing Costs Rise, Repercussions Will Resonate Throughout the Economy
By Paul Blustein and Nell Henderson
Washington Post Staff Writers
Saturday, April 17, 2004; Page E01


....In the world of interest rates, "normal" is something Americans haven't experienced for a while. During the past couple of years, consumers have been spoiled by opportunities to borrow at rates that were last available generations ago. They happily took advantage of that cheap credit to buy bigger homes and fancier cars, while running up debt on their credit cards and home-equity lines. Now that rates appear to be headed toward some semblance of normal, a considerable amount of adjustment is likely to be in store for America's debt-laden economy, as car buyers are weaned from interest-free financing, homeowners get socked with higher charges on their equity lines and monthly credit card bills rise.

Borrowing costs are still far below the inflation-bloated levels of the 1970s and 1980s, of course, and nobody can be certain that the latest run-up won't be reversed. But economists are nearly unanimous in agreeing that because of the recent improvement in the employment picture and this week's report of an increase in consumer prices, the Federal Reserve will start lifting the short-term rates it controls later this year. And the financial markets have already sent longer-term rates upward, with the yield on the benchmark 10-year U.S. Treasury note hitting 4.34 percent yesterday, compared with 3.85 percent six weeks ago....

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The prospect of a rise in rates "is not quite as big a problem as people think, because most lending in the U.S. is now fixed-rate," said David Wyss, chief economist at Standard and Poor's, who gave himself as an example: "I just refinanced my mortgage at a fixed rate, so I don't care what rates do for the next 15 years; I know what my monthly payment is."...

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Still, Wyss and other economists worry some about home equity credit lines, which soared from $150 billion in 2000 to $346 billion at the end of last year. These are generally tied to the prime lending rate, which has remained low but is almost certain to rise in coming months once the Fed starts nudging its own short-term rate higher. And if 30-year mortgage rates reach the 6.5 percent to 7.5 percent range, as many forecasters expect in 2005 and 2006, that is bound to cool the housing market....


http://www.washingtonpost.com/wp-dyn/articles/A18892-2004Apr16.html