NEW YORK — The trends sound ominous. Mortgages get more expensive and both big companies and the federal government pay more to borrow. The stock market dips on suspicions that the Federal Reserve could start pulling its support for the economy this year.
The thing is, these current trends fall under the heading “good news.”
How so? Because record-low interest rates are a legacy of the financial crisis. And as long as they disappear gradually, many in the financial world will be happy to see them go.
“It will mean we’re in a healthier economy,” says J.J. Kinahan, chief strategist at TD Ameritrade.
Encouraging reports on housing and hiring, along with a soaring stock market, have led many to suspect that the Fed could cut back on its bond buying in the coming months. That’s the main reason traders have been selling bonds over recent weeks, driving down prices and lifting the 10-year Treasury yield to its highest level of the year on Wednesday — 2.23 percent.
When the Fed makes a move, many investors probably won’t consider it a vote of confidence for the economy. Some believe the stock market could plunge without the Fed’s support. Others are likely to move money out of the market because they’re unsure about how everybody else will react.
“Maybe it’s bad for the stock market in the short term,” Kinahan says, “but it’s probably good for housing, manufacturing and hiring. It will be better for everybody overall.”
For those who think the economy remains fragile, the prospect of higher rates still stirs up fears. They worry that rising interest rates will derail the choppy economic recovery.
One problem with forecasts of disaster is that they rely on the past, and history can be a misleading guide. Before the Great Recession, rising rates usually followed a stretch of rapid economic growth or surging inflation.
The OECD’s report, for instance, looked at the U.S. economy in 1994, a horrible year for the bond market but not so bad for the economy.