How Higher Rates Touch Consumers, Firms, Investors
When rates are low, rules require companies to set aside more money because their bond holdings produce little interest. Conversely, higher rates help: Companies can earn more on their bonds, so they don't have to invest as much.
A small increase in rates can produce big savings. The Pension Benefit Guaranty Corporation, a government agency that takes over troubled company pensions, must pay $110 billion in future benefits. It estimates that a 1 percentage point rise in rates would reduce the amount it needs to invest today by 10 percent, or $11 billion.
â¿¿ GOVERNMENT DEFICIT.
The federal government â¿¿ the nation's biggest borrower, with a $17 trillion debt â¿¿ might have the most to lose from higher rates. The super-low rates of the past few years have given the government a break on the interest it pays on the federal debt at a time when the annual deficit was soaring.After four years of $1 trillion-plus deficits, the nonpartisan Congressional Budget Office has forecast that the deficit will shrink to $642 billion this year. That would be down from $1.09 trillion in the 2012 budget year. The CBO factored higher rates into its forecasts. But some economists say it might not have anticipated how high rates might go. The 10-year Treasury averaged 1.8 percent last year. The CBO expects it to average 2.1 percent this year, 2.7 percent in 2014 and keep rising to 4 percent by 2018. Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, said those projections now look low. Still, Sohn said other trends could offset the rate rise. "On balance, a stronger economy generating more tax revenue will be far more beneficial than the higher cost of debt," he said. Last year, the government paid $220 billion in payments on the publicly held part of its debt. The CBO thinks that figure will be only slightly higher this year but will more than double by 2018.
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