Higher Interest Rates Spur Economic Concerns The interest rate on a 30-year mortgage jumped by a quarter point Wednesday, and the rate on a 10-year Treasury bond is up more than half a point over the past two weeks. The increase complicates the Fed's task of encouraging a recovery.
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Higher Interest Rates Spur Economic Concerns

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Higher Interest Rates Spur Economic Concerns

Higher Interest Rates Spur Economic Concerns

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MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

First this hour, what rising interest rates are telling us about the state of the economy. Over the past few weeks, long-term interest rates have been rising fast and there's concern the increase could undermine efforts to revive the housing sector. There was a bright spot today when the federal government held one of its periodic auctions of Treasury bonds. The sale went off without a hitch, which means long-term rates stabilized. NPR's Jim Zarroli explains how it all fits together.

JIM ZARROLI: For Rob Nunziata, the past few months have been a little disorienting. Nunziata is president of FBC Mortgage, an Orlando mortgage lender and broker. And with mortgage rates coming down, he's suddenly getting more business than he can handle. He's actually had to hire people.

Mr. ROB NUNZIATA (President, FBC Mortgage): Actually, the last couple of months have reminded me of '04 - late '03 and '04 - when there was a big refi boom. It's - that energy is kind of back in the market, where you're getting so many phone calls a day, it's hard to actually call the customers back.

ZARROLI: But in recent weeks the tide has begun to turn again. Mortgage rates have come back up.

Mr. NUNZIATA: Yesterday was, really, a horrible day for mortgage rates. We saw - the 10-year bond shot up - I think - the most it's moved in a couple years.

ZARROLI: The 10-year Treasury bond is the one a lot of lenders use as a benchmark when they set mortgage rates. And since last week, it's gone from about four and three-quarters percent to over five. In a way, this is a good thing. Last fall, investors were so scared about the economic meltdown that they put a lot of money into Treasury bonds, which are traditionally seen as a safe haven in perilous times. Now, people are feeling more confident. So they're taking out their money and putting it into other kinds of investments like stocks and corporate bonds.

Professor ALLAN MELTZER (Political Economy, Carnegie Mellon University): They're beginning to take on a little more risk. That's a good sign.

ZARROLI: Allan Meltzer is a professor of political economy at Carnegie Mellon University. But Meltzer also sees the rise in rates as a harbinger of long-term economic trouble. He says the government has vastly increased its spending in its effort to get the economy going.

Prof. MELTZER: We have a massive amount of stimulus. Nothing like this has ever occurred in the United States, maybe anywhere else, ever.

ZARROLI: And Meltzer says with so much money flooding into the financial system, investors are beginning to worry about inflation. And that fear is pushing up interest rates. He says they're not going up every day. In fact, rates were down a bit today.

Prof. MELTZER: Bond markets are full of nervous and anxious buyers. So there will be some days when rates will come down and some days when rates will go up, but the trajectory will be higher.

ZARROLI: And this upward trajectory will greatly complicate the attempts by the Treasury Department and the Federal Reserve to breathe some life into the housing market. Housing has been at the center of the economy's troubles. A big rise in mortgage rates could end the housing recovery before it's actually begun. And that's a big concern to Florida lender Rob Nunziata.

Mr. NUNZIATA: We've seen such a pick in refinance transactions that, you know, that's become a big part of our business and obviously if the rates go up, that percentage of our business is going to slow down.

ZARROLI: Longer term, the Obama administration is trying to ease investor fears about the future. Treasury Secretary Tim Geithner is headed soon to China - a big purchaser of Treasury bills. He's expected to say the government will move quickly to get its debt under control once the economy has fully recovered.

Jim Zarroli, NPR News, New York.

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