NY Times and interest rates

If you read the NY Times Business section last friday, you would have thought the sky was falling. Click here for the article.

"Homeowners are not the only ones who will have to swallow higher costs. Corporations, accustomed to financing operations with cheap debt, will see their expenses rise, cutting into profits. In addition, rate increases will crimp the private equity buyout boom, which has been fed in large part by the heavy issuance of corporate debt at low rates"

But the Times should have focused more on this sentence:

Stocks have so far shrugged off the jump in interest rates. The Dow Jones industrial average closed at 13,553.72 yesterday, up 71.37 points; the average is 0.8 percent below its high of June 4.

Sure, the negative interpretation of rising interest rates has some bite. All else equal, rising interest rates should dampen housing demand, constrain business activity and dampen growth.

However, there is a positive spin to this that should at least be mentioned. A positive interpretation would mention that after a weak Q1 growth rate of 0.6% annualized, the markets are now expecting Q2 growth to accelerate at a 3.5-4% annualized rate. Increased growth means more borrowing by consumers and business, shifting the demand for capital, and hence interest rates, up.

My theory has just received a thumbs up from Professor James Hamilton over at Econbrowser:

Moreover, if this were purely a rise in real rates induced by either international factors or the Fed, I would have expected to see stock prices fall significantly. If expected future profits and dividends are held constant and the rate at which they are discounted goes up, the stock price would have to fall. Yet we have seen stocks hold their own, even as bond prices plunged, suggesting that rising yields have come at the same time as rising expectations of future profits and dividends.

Let this be a lesson that you should read the business press with a high degree of skepticism. Reading the business section does not constitute an alternative to paying attention and learning the theories.