Economy hurting from higher rates

March 14, 1994|By New York Times News Service

Interest rates have climbed by more than a percentage point in five months, and the American economy is beginning to feel the pinch.

The great rush to refinance mortgages at lower rates and lower monthly payments -- a big source of extra cash for consumer spending -- has slowed sharply, the Mortgage Bankers Association reports.

Bank loans to individuals and companies are no longer rising. And many families are rushing to buy houses before mortgage rates go any higher, a flurry of activity that probably will not last, some economists say.

"All the data about mortgages and lending suggest that the rise in interest rates is beginning to produce the first stages of an economic slowdown -- a mild one, but clearly slower growth," said Nancy R. Lazar, a senior economist at ISI Group, a Wall Street investment house.

Low interest rates had been the cornerstone of the Clinton administration's strategy to strengthen the economy and drive up employment.

And while no one had expected rates to remain as low as they had been last October -- when the yield on the 30-year Treasury bond, a barometer for many important lending rates, fell below 6 percent for the first time in 25 years -- neither had most people expected the rise to be so quick and so strong.

Friday the yield on the 30-year bond neared 7 percent, and the rates for other loans lasting two years or more have risen in tandem.

Most of this rise has occurred since early February, when the Federal Reserve, concerned that the robust economy might be inflationary, decided to push up interest rates slightly to inhibit borrowing and spending.

Wall Street traders, who have the power through their buying and selling of bonds to make interest rates fluctuate, then pushed up rates more.

They responded not so much to expectations of inflation, but to such unsettling issues as the Whitewater investigation involving President Clinton and the administration's threat of trade sanctions against Japan.

"This extreme nervousness on Wall Street is relatively temporary," said David Jones, chief economist of Aubrey Lanston, a bond trading firm.

The sudden jump in interest rates bothers administration officials, though it has not shaken them from their forecast that the national economy will grow 3 percent this year, even if interest rates do not subside.

The economy had been growing at twice that rate from July through December, but 3 percent growth will be enough, the officials say, to create jobs and reduce unemployment.

"Obviously, we would prefer a lower 30-year Treasury bond rate than we are seeing now," said Gene Sperling, deputy assistant to the president for economic policy. "But even if interest rates stayed where they are now, it is still a far more stable and favorable economic environment than we inherited over a year ago."

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