Wall Street wary of Fed move

June 27, 2013 at 3:03 PM
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NEW YORK, June 27 (UPI) -- News the U.S. Federal Reserve could wind down its quantitative easing prices next year has economists debating the repercussions, some approvingly, some not.

"It causes me to be a bit more cautious," The Wall Street Journal quoted Terex Corp. Chief Executive Officer Ron DeFeo as saying.

"I am hesitant, because I really don't believe the U.S. economy is in a strong enough growth mode," the crane and paving equipment executive said.

Rising interest rates would likely be the most direct impact if the Fed backs away from an $85 billion per month asset purchasing program as expected this year. Lending costs were already increasing, but if the Fed no longer pumps money into the economy, it becomes more expensive to borrow.

Economists are looking specifically at interest-sensitive sectors of the economy, like the housing market and the automobile industry.

An investment analyst in Denver, Dan Katz, signed for a 30-year loan at rates just above 4 percent just before Fed Chairman Ben Bernanke held the press conference that solidified the Fed's intention to slow down its monthly purchases if the economy picks up. The very next day, the same loan was saddled with an interest rate of 4.625 percent, the Journal said.

Katz is emblematic of a counter-intuitive economic doctrine, which says when prices go up consumers, instead of being turned off, rush to buy because waiting means they will have to pay more.

If that is true, rising interests rates could help, rather than hurt the economy.

Goldman Sachs economists have predicted higher interest rates coupled with lower stock prices could slow the gross domestic product by 0.4 percentage points.

Higher interest rates are an immediate burden that first hurts lower-income families, because those with means put more money down on a home or a car, meaning they borrow less. That can shut some out of making a purchase at all.

Bank of America Merrill Lynch economists said a 1 percentage point increase in borrowing rates adds $80 to $100 to the monthly cost of a $160,000 mortgage.

"As we speak today the car market is generally healthy, but it's very fragile all in the same breath," said the owner of four automobile dealerships in upstate New York William Fox.

"We feel it very quickly if something goes wrong," he said.

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