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Long-Term Interest Rates Start Moving Higher


OK, Scott just made clear economic issues have some competition for top billing at the G 8 Summit in Northern Ireland. We do, though, want to drill down into one economic question this morning, and that's why interest rates here at home are going up. The bond market has pushed them to the highest levels in 15 months, and that includes mortgage rates.

Let's turn, as we often do, to David Wessel. He's economics editor of The Wall Street Journal. David, good morning.

DAVID WESSEL: Good morning.

GREENE: So what interest rates are we talking about, here?

WESSEL: Well, the very short-term rates, the ones that banks pay each other when they borrow overnight, the ones that consumers get on their savings accounts or money market funds are still very, very low, nearly at zero.


WESSEL: But longer term rates are up, the ones that the Treasury pays when it borrows for 10 years, the ones companies pay when they sell bonds, and importantly, the ones that homeowners pay on new mortgages. The benchmark rate is the 10-year Treasury, what it costs the Treasury to borrow for 10 years. At the beginning of May, the government borrowed at 1.6 percent.

Today, they're paying about 1.25 percent. That's still very low, but it's up quite a bit, as these things go.

GREENE: Up quite a bit, it sounds like. And what about those rates on mortgages?

WESSEL: Well, they tend to move with Treasury bonds. Thirty-year fixed-rate mortgages are now at 4.15 percent, the mortgage bankers association says. Just a few months ago, they were only three-and-a-half percent. That, of course, makes it more costly to buy a house, probably not enough more costly to snuff out the recent increase in home prices. That's because a lot of houses are sold for cash these days, so mortgage rates don't matter.

And for another, 4.15 percent is still pretty low, lower than they've been in the memory of most Americans. But it is taking a toll on refinancing. At these rates, fewer and fewer people are deciding to refinance their existing loans. That's actually costing the banks some money, because they make money on the fees from refinancing.

GREENE: Mm-hmm. I guess, David, the next question is what this tells us about the economy. Why is this happening now, and what can we read from it?

WESSEL: Well, there's a big debate about why this is happening now. The good news version is the U.S. economy is finally healing. Rates are heading back towards normal, as the market anticipates better times ahead, a day when the economy will no longer need the extraordinary efforts of the Federal Reserve to keep interest rates very, very low.

But the bad news version is that the markets are misreading the Fed. The market thinks the Fed is more optimistic than the Fed really is, so the market is pushing up rates in anticipation of the Fed doing something. That could put a break on the economy prematurely. It's a reminder that we're living in this huge economic experiment, and no one - whether the Fed or the markets - is quite sure how it's going to work out, especially when the Fed starts to wean the economy off of extraordinarily low interest rates and easy money.

Now, which is right, the good news or the bad news? Well, I don't really know. The Wall Street Journal, we surveyed 50 private economists last week, and three times as many blamed misreading of the Fed. Basically, this is a mistake, as blamed a stronger economy, the good news version.

GREENE: Okay. So everybody's trying to read the Fed and decide what the Fed is going to do. What is the Fed going to do?

WESSEL: Well, one thing the Fed is going to do is after a meeting they have this week, Tuesday and Wednesday, Ben Bernanke is going to have a press conference, the Fed chairman. Now, he kind of started all this on May 22nd with some Congressional testimony that roiled the markets not only here in the United States, but all over the world.

So basically, on Wednesday afternoon, he has a choice or a chance to either muddy the waters further or clarify the situation. I think one message he's almost sure to try and deliver very emphatically is the Fed is thinking about scaling back the $85 billion a month it's spending to buy bonds - that's to keep long term rates down - because it is feeling a little better about the economy.

But some people on the markets have thought that that means the Fed is preparing to move sooner to raise those very short term rates, and I expect Mr. Bernanke to be pretty emphatic and say: We're not doing that until the unemployment rate gets much lower, and that's not going to happen any sooner than we said.

GREENE: All right. Well, I'll be watching for that press conference Wednesday from Ben Bernanke.

WESSEL: I'm sure you will. It's almost as good as that Norwegian television show.

GREENE: That's right. Something else we reported on earlier in the program. Boring television. David, thank you for always clearing up the muddy waters for us. We appreciate it.

WESSEL: You're welcome.

GREENE: David Wessel. He's economics editor from The Wall Street Journal. Transcript provided by NPR, Copyright NPR.

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