High rates affect firms, consumers, investors

The Federal Reserve Building is on Constitution Avenue in Washington D.C. All it took was speculation that the Fed could slow its bond buying months from now — and then a few words Wednesday from Chairman Ben Bernanke to confirm it. The result is that record-low interest rates are on the way up. (AP/File)

J. Scott Applewhite

WASHINGTON — All it took was speculation that the Federal Reserve could slow its bond buying months from now — and then a few words Wednesday from Chairman Ben Bernanke to confirm it.

The result is that record-low interest rates that have fueled economic growth, cheered the stock market, shrunk mortgage rates but punished savers are headed up.

Suddenly, long-term borrowing rates, though still historically low, are rising. And once the Fed starts scaling back its bond purchases, those trends could accelerate.

It means home loans are starting to cost more. Corporations will pay more to borrow. Bond investors are being squeezed.

The stock market responded by plunging Thursday.

It was a “knee-jerk” reaction should subside, said Steve Slifer, a Charleston-based economist and owner of NumberNomics.

“That’s what the markets do, they always react and overact at times,” he said. “Pretty soon somebody from the Fed will say ‘Chill, we are not going to act so fast,’ and they should not panic about that.”

The fact that Bernanke and the Fed think the economy is healthier represents a critical dose of confidence.

In the long run, a robust economy should sustain the housing rebound, support job growth and encourage businesses to borrow, even at somewhat higher rates.

More economic growth should ultimately boost stock prices.

The Fed’s bond purchases have helped keep long-term rates down. Bernanke said he expects the Fed to stop the buying by the middle of 2014 if the economy can manage without that stimulus. If the economy weakens, the Fed won’t hesitate to step up its bond purchases again., he stressed.

Here’s how higher rates will affect consumers, businesses, investors and others.

The main impact on consumers will likely be higher mortgage rates. Rates on auto loans, student loans and credit cards probably won’t rise much soon because they’re more closely tied to the short-term rate that isn’t expected to rise before 2015.

The average rate on a 30-year mortgage jumped from a record low of 3.31 percent in November to 3.98 percent last week. That’s the highest point in more than a year. But economists say the housing recovery can withstand higher rates.

“It’s that improving economy that’s bringing people back into the housing market,” said Greg McBride of Bankrate.com. “The recent rise in mortgage rates does not negate that.”

Higher rates generally benefit those with much of their money in savings. They can earn more on bond investments, CDs and savings accounts.

But savers aren’t likely to enjoy much benefit soon. Banks already have plenty of deposits, and they don’t need to boost rates on CDs or bank accounts to attract more.

Ordinary investors who have soured on stocks have poured about $1 trillion into bond funds since the last recession began in December 2007. These investors might be having second thoughts.

That’s because as rates rise, bond investors can lose principal as the value of their existing bonds declines. Investors in bond funds, especially those with long-term holdings, are most at risk.

One fear is that baby boomers will pull out of bond funds.

If so, that could send bond yields rising further in a cycle of selling that spurs more selling.

Higher mortgage rates could lower demand for new homes and squeeze builders, but many say they remain optimistic.

They say higher rates will encourage potential buyers to get into the market before rates rise further.

Eventually, if mortgage rates keep increasing, some buyers would no longer be able to afford a home. They might have to buy a smaller house or forgo some amenities.

Higher rates could further depress loan demand at many small businesses, at least in the short run.

But higher rates can also benefit small businesses because they signal that the economy is strengthening.

Once companies make more money because they have more customers, they’re more inclined to expand or buy equipment even though financing is costlier.

Large U.S. companies have sold more than $4 trillion in bonds to investors in the past 2½ years, according to Dealogic. But as rates began rising last month, new sales slowed. Still, companies have been collecting record profits.

That means they should still be able to expand their businesses and hire more, even if borrowing costs rise.

Rising rates are a relief for companies with employee pensions.

When rates are low, rules require companies to set aside more money because their bond holdings produce little interest.

Conversely, higher rates help: Companies can earn more on their bonds, so they don’t have to invest as much. A small increase in rates can produce big savings.

The federal government — the nation’s biggest borrower, with a $17 trillion debt — might have the most to lose from higher rates.

The super-low rates of the past few years have given the government a break at a time when the annual deficit was soaring.

Tyrone Richardson of The Post and Courier and AP staffers Bernard Condon, Joyce M. Rosenberg, Alex Veiga and Martin Crutsinger contributed to this report.