Greenspan: Households well prepared for rising rates

July 22, 2004

Even 'dynamic adjustments' shouldn't harm economy

By Glenn Roberts Jr.
Inman News

Federal Reserve Chairman Alan Greenspan Rising interest rates should not have much impact on debt-service burdens for businesses and households, Federal Reserve Chairman Alan Greenspan said Tuesday during a semiannual monetary policy report to Congress.

"Very large fractions of the total outstanding obligations of businesses and households are long-term, fixed-rate debt," Greenspan stated in his testimony. "In short, financial markets along with households and businesses seem to be reasonably well prepared to cope with a transition to a more neutral stance of monetary policy."

And financial intermediaries are generally "profitable and well-capitalized and appear to be well positioned to manage in a rising rate environment," he stated, though some financial intermediaries and other creditors that extended loans or bought securities during the time of low interest rates could sustain capital losses as interest rates rise.

If there is a "more dynamic adjustment of interest rates," Greenspan said the economy should be able to weather that storm. And he said that even in an economic environment in which interest rates rise smoothly back to more typical levels, there is still the possibility of increasing instances of financial strain.

Many household and business balance sheets were restructured during the protracted period of low interest rates, he said, and "homeowners were able to refinance at lower interest rates almost half of total outstanding home mortgage debt" from mid-2002 to mid-2003.

The recent rise in market interest rates "has slowed the pace of mortgage refinancing and reportedly has precipitated some winding down of leveraged positions among major mortgage market participants," he also stated.

Copyright: Inman News Features

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