The question is twofold: when, and not if, interests will go up and by how much. Consumers have grown accustomed to single digit interest rates and this has fueled a large portion of this fragile recovery. Rising interest rates will harm a few areas of the economy that are experiencing small gains. For instance, higher interest rates mean higher mortgage payments. As a results, people who are considering whether to buy a home in the next year or two mat scared off by interest rate increases. According to Christopher J Mayer, an economic and financial professor at the Columbia Business School interviewed by the New York Times, a 1% increase in interest rates adds 19% to the cost of a house.
Higher interest rates also spell the end of cheap credit. America has been flooded by an overabundance of cheap credit. Yet, higher interest rates means that people will pay more on credit card payments and loans. This will discourage borrowing and once again dry up consumer spending. These higher rates also place tremendous strains on the United States government because its payments on the nation’s debt will skyrocket. This is being done to combat inflation, but the ripple effect of higher interest rates will be felt across the economy.
Here is an article in the LA Times detailing the harm that increased interest rates will bring to the bond market.
Here is a rosier interpretation of what higher interest rates will mean for the economy
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