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Raising rates: Not so easy

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Federal Reserve Board Chair Janet Yellen could help get interest rates up from record low levels, but rates will rise only if bond issuers and bond buyers think they should. Kurt Karl, Swiss Re’s chief economist, gave that assessment Friday in an interview.

Central bankers around the world have talked about a need to keep interest rates low to help home buyers and business borrowers overcome the lingering effects of the Great Recession. The low rates have been hard on issuers of long-term care insurance (LTCI), long-term disability insurance, and other products designed in such a way that the issuers rely on interest earnings to help pay benefits years in the future.

Even if Yellen and other central bankers decided today to get rates up, they can only do that if bond issuers are confident enough their prospects for growth to pay more for credit, Karl said. In the past, some central bankers in other countries have tried to raise 10-year government bond rates unilaterally.

Bond issuers and buyers assumed the increase would cause the economy to cool. ”There was not a lot of growth expectation,” Karl said.

The result was that the rates simply stayed where they were and did not budge, Karl said. Before central bankers can get rates out of the basement, market players have to expect to see some inflation and real, inflation-adjusted growth, and enough economic strength for the economy to hold up in spite of a modest increase in rates, Karl added.

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