Keen Interest : Loan Rates Rise, Worrying Policy-Makers, Consumers

Sparked by inflation-hedging bond traders anticipating an improved economy, interest rates have inched up this week--creating anxiety among policy-makers and consumers.

Policy-makers trying to revive the economy fear a return to high inflation, and consumers seeking to finance homes, cars and other major purchases worry that rates may have bottomed out.

Yields on 30-year Treasury bonds rose Thursday to 7.66%, as investors continued their recent migration out of the low-yielding credit market into stocks. The disaffection with long-term bonds, in turn, has pushed up 30-year fixed mortgage rates, which rose to 8.50% Thursday from an 18-year-low of 8.31% last week, according to HSH Associates, a Butler, N.J., publisher of mortgage information.

While most analysts believe that the recent, tiny rate uptick is temporary, economic growth often heats up inflation. And with a presidential election year putting pressure on lawmakers to jump-start the economy, some are concerned.

“Having achieved . . . gains” against inflation, Federal Reserve Gov. Edward Kelley told Reuters, “we’ve got to do our very best to make sure that we don’t give them up again as we begin to go back into expansion.”

Added David F. Seiders, chief economist for the National Assn. of Home Builders: “It’s mystical to me why rates should be going up now, given all the signals. But if Congress or the Administration agrees to something big on the fiscal side, that might increase” interest rates further.

The White House and Congress are working on legislation to revive the economy, possibly through tax cuts and other measures. But experts say the proposals could increase federal spending, which would lead to additional government borrowing that might increase interest rates.

Experts are deeply divided over the economic outlook, with some saying that prospects for keeping inflation in check this year are strong and others seeing a price spiral. Yet both camps agree that ambitious legislative action to revive the economy may backfire, reversing the long decline in inflation that has sent interest rates tumbling the past year.

“There is a great deal of complacency about the inflation outlook,” said William Sullivan, director of money market research at Dean Witter Reynolds Inc. “The dominant sentiment in the investment community is that inflation is dead. But in truth, the evidence is otherwise.”

The Labor Department reported Thursday that inflation reached a five-year low in 1991 of 3.1%. Higher interest rates would hurt consumers seeking to buy or refinance a home and would reverse a recent slide in everything from credit cards rates to automobile loan rates.

Rate increases would help savers and investors who have seen their interest income plummet as rates on three-month Treasury bills and short-term bank certificates of deposit dropped to less than 4%.

While anxiety over rising interest rates is increasing, many analysts are urging consumers to take advantage of the current low rates.

“We are divided over the future direction of interest rates in this office,” said Paul Havemann, vice president of HSH Associates. “The advice we’ve been giving homeowners for the last week is, ‘Run, don’t walk, to the nearest lender’ ” to refinance or buy a home.

Ticking Up

After dropping sharply, mortgage rates have inched higher over the last few days.

Weekly national averages except for latest three, which are preliminary daily figures.