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Despite Fed stimulus plan, interest rates are still up

Stacey Vanek Smith Dec 10, 2010
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interest rates paper www.mtgfoundation.com

Despite Fed stimulus plan, interest rates are still up

Stacey Vanek Smith Dec 10, 2010
interest rates paper www.mtgfoundation.com
HTML EMBED:
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TEXT OF STORY

Kai Ryssdal: In today’s installment of the curiouser and curiouser study of the American economy, we give you: interest rates. Mortgage rates are the highest they’ve been in six months. Government bond yields — which is what those rates are based on — took a huge jump today.

Which is strange, considering the Federal Reserve is spending hundreds of billions of dollars to make interest rates go down. It does sound confusing and academic. Until you listen to Marketplace’s Stacey Vanek Smith.


Stacey Vanek Smith: Last month, the Federal Reserve pledged $600 billion to try and push long term interest rates down. The Fed hoped that would encourage consumers to borrow money and buy things, and encourage businesses to borrow money and hire. But interest rates haven’t cooperated and that’s bad news for the economy’s fragile recovery, says economist Julia Coronado with BNP Paribas.

Julia Coronado: If you’re looking to buy a house, higher rates mean you can afford less house. A lot of people, if interest rates go up, they’re less likely to buy a car. So that slows down spending and it slows down the economy.

The government’s efforts to help growth by pumping money into the economy have contributed to the problem, says Jack Ablin, chief investment officer for Harris Private Bank. He says stimulus from the federal reserve and the government generated expectations for faster economic growth.

Jack Ablin: Generally interest rates respond to economic prospects and as investors and lenders believe that things are improving, interst rates go up accordingly.

Ablin points out that rates are still at historic lows. But all the debt the government is racking up gives investors the jitters, says economist Coronado.

Coronado: The government is borrowing more and more and more and that makes investors worried about the long-run fiscal situation and it makes them demand a higher interest rate.

So optimism about the future of the U.S. economy is pushing interest rates up. And pessimism about the future of the U.S. economy is pushing interest rates up too?

Coronado: Even economists are confused.

In New York, I’m Stacey Vanek Smith for Marketplace.

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