Joe LaVorgna, chief U.S. economist at Deutsche Bank, observes that higher interest rates would be positive for banks' net interest margins, thereby inducing them to loosen the lending spigots.
"Debt service is not the problem for people who want to take out a mortgage," he said. "Lower rates and a flatter curve aren't going to help the housing market too much if you can't get a mortgage because standards are still too tight."
For households, this sequence of ultra-low rates for an extended period followed by a modest bump higher enables them to have their cake and eat it, too.
Mortgages and auto debt taken out in recent years have been primarily longer-term obligations with fixed rates, while most interest-bearing assets are short-term instruments that will provide a greater boost to household income once rates rise, according to Kelly. So on the liability side, there's less scope for rising rates to eat into disposable income, and more upside on the asset side of the ledger.
"There's roughly $10 trillion in the banking system that's earning zero," added LaVorgna. "Those people aren't investing in the stock market; they're keeping their money in cash and spending less because when you're in a low-interest-rate environment, you don't buy more, you save more."
A colleague of LaVorgna's, Deutsche Bank Chief Global Strategist Bankim Chadha, recently put forward the view that lower rates prompt households to save more, and therefore consumer spending is not an effective avenue for stimulus through traditional monetary policy actions.
So higher rates, to a certain point, could prove a boon for consumers—and the same is true for stocks, argues JPMorgan's Kelly. His analysis shows that rising rates from a low level tend to be accompanied by rising stock prices, while hikes from higher levels typically happen in tandem with declines.
"When the Federal Reserve raises rates from low levels it is generally taken as a sign of economic confidence—that the economy no longer needs the Fed’s help—and that rising confidence is generally positive for stocks," the economist wrote.
A rate hike that signaled increased confidence in the U.S.'s economic prospects could also conceivably shatter the conservative mentality that's pervaded corporate America, providing the impetus for expectations and priorities to be reorganized.
"With the advent of the Fed promoting lower for longer has been a sense of complacency in the business community, more of a focus on financial engineering and balance sheet management vs. top-line growth," says Jacob Oubina, senior economist at RBC Capital Markets. "There's a dearth of focus on revenue- generating capital expenditures, which is the traditional way successful businesses have been run."