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Industry should not fear rising interest rates.

Rising interest rates are no stranger to an economic recovery. Usually, both short- and long-term interest rates bottom out during the first year of a business upswing, and rise thereafter. Since the typical post-war business recovery has lasted over four years, it's pretty c]ear that rising interest rates do not immediately choke off an economic expansion. Nor, for that matter, do they send stock prices spiraling downward, since the market usually continues to rise at least through the third year of an economic recovery.

You wouldn't know this from all the hysteria over recent trends in interest rates. Recently, long-term interest rates, measured by the bellwether 30year Treasury bond's yield, moved back over 7 percent, for the first time since early April. And the markets are now speculating that short-term rates will begin rising as well, nudged higher by a less accommodating central bank.

In view of the concerns over inflation, plus the enormous amount of liquidity the Fed has had to create to drive short rates as low as they are, such a move would neither be unreasonable, nor should it be anathema to the economy and to the stock market. Indeed, failure by the Fed to change its easy-money posture this far into an economic recovery might very well have more adverse consequences, longer run, by enabling today's inflation pressures to become tomorrow's inflation problem.

As for the argument that the economy needs lower rates to grow, that has become increasingly specious. For one thing, lower rates have cut into households' interest, income, causing many especially senior citizens -- to lose buying power. For another, low rates haven't generated much borrowing, since both consumers and business are trying to reduce their debts. Third, low rates might actually hurt job creation by making it even cheaper for business to buy or lease a computer or other piece of equipment, instead of hiring workers.

Dr. Irwin L. Kellner has been twice recognized by Business Week magazine as the most accurate forecaster of the year. He was also named 'Number One Prognosticator' by Institutional Investor magazine and ranked among the top five interest rate forecasters by the Wall Street Journal.
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Title Annotation:Insider Outlook; real estate industry
Author:Kellner, Irwin L.
Publication:Real Estate Weekly
Article Type:Column
Date:Jun 30, 1993
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