Economy Better, but Not Yet Out of Woods

With the recent proliferation in floating-rate debt outstanding in the U.S. economy, higher interest rates will mean higher borrowing costs for countless consumers paying off mortgages, student loans and credit card debt. That will be an added drag on economy.

Fannie Mae FNM and Freddie Mac FRE alone are holding trillions in consumer debt on floating-rate mortgage loans, and the federal government is currently expanding their role in the mortgage market. Add to that the $500 trillion in derivatives contracts held by companies and financial institutions that are based on Libor.

"This is a situation that did not exist when the Fed had to raise interest rates dramatically in the early 1980s, and we haven't seen yet what the economic costs of it will be when rates go up," says Josh Rosner, analyst with Graham Fischer & Co. "We are headed for a higher interest-rate environment."