Rising Interest Rates Spark Inflation Concerns

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The recent rise in long-term interest rates has caused anxiety not just on Wall Street, but also on Main Street where mortgage rates have been steadily heading higher. The 10-year Treasury note is one of the main drivers of the mortgage market and last week it moved above 5 percent. In just the last several weeks mortgage rates have risen by a half a percentage point, meaning a $300,000 loan will now cost $100 more a month than in mid-May.


Anyone in the market for a home loan will tell you that interest rates are on the rise. The 10-year treasury notice is one of the main drivers of the mortgage market. And last week it moved above the five percent level.

NPR's Jack Speer helps explain why rates have been heading higher.

JACK SPEER: The recent rise in long-term interest rates has caused some head scratching on Wall Street. But David Wyss, chief economist for Standard & Poor's, says it's not all that surprising when you look at what's been going in the rest of the world.

Mr. DAVID WYSS (Standard and Poor's): It's partly the economy is doing better but the other thing is foreign interest rates are going up. Because even though the FED isn't tightening, the European Central Bank is, the Bank of England is, the Bank of Japan is, the Bank - People's Bank of China - they're all moving interest rates up.

SPEER: As a result, Wyss says U.S. interest rates have had to keep pace in order to continue to attract foreign investment. That inflow investment from overseas is needed to offset the nation's negative savings rate. And as economies here and abroad shows signs of stronger growth, there is concern that inflation could heat up, causing the Fed to possibly intervene. Until very recently, much of Wall Street was thinking the Fed's next move would be an interest rate cut. That doesn't seem very likely now, says David Wyss, though he doesn't expect an interest rate hike from the Fed any time soon either.

Mr. WYSS: I think the bond market is doing the Fed's work for it. I'm not quite sure why the Fed needs to raise interest rates, if bond yields are already up, you know, half of percentage point from where they were a month ago. That's going to put enough of a drag on the economy that I don't think the Fed needs to shove its oar in as well.

SPEER: Most economists still expect when the Fed meets later this month it will opt to leave interest rates where they've been for more than a year now, especially given the ongoing weakness in the housing market. Greg McBride is senior financial analyst for, which tracks consumer loan rates.

Mr. GREG MCBRIDE (Senior Financial Analyst, Mortgage rates have moved up about half a percentage point in the last three and half weeks. A $300,000 loan is now going to cost $100 more every month than it would have in mid-May. You've seen the number of applications drop off in each of the past couple of weeks as interest rates continue to move higher.

SPEER: McBride says that increase in interest rates could delay recovery in the housing market. Wall Street gets more information on the inflation piece of the puzzle later this week when the government releases its wholesale and consumer inflation figures.

Jack Speer, NPR News, Washington.

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