Higher rates unlikely to derail recovery

We doubt that the rapid rise in long-term interest rates in recent weeks will derail the economic recovery. For a start, rates are still at unusually low levels. Moreover, the primary reason why the Fed is now considering tapering its monthly asset purchases, which triggered the rise in long rates in the first place, is that the outlook for the economy and the labour market has improved. Even if mortgage rates rise, the collapse in prices over the past seven years means that housing is still very affordable. The more important macro effect is that rising house prices are pulling more and more mortgage borrowers out of negative equity. In addition, the level of business investment is still unusually low compared with the level of profits. That suggests the rising cost of borrowing wouldn't necessarily prevent a more rapid expansion in investment if businesses began to share the Fed's growing confidence in the economic outlook.