Strategists split on rate rise fallout

By Ros Krasny

NEW YORK (Reuters) - The recent rise in U.S. interest rates is causing a split among Wall Street's top strategists on the implications for inflation and the economy, contributing to one of the trickiest investment environments in recent memory.

The jump in yields on U.S. government debt, which act as a benchmark for many lending rates, particularly mortgages, also drew sharply differ views at the Reuters Investment Summit Outlook in New York on the extent to which they could contribute to another leg down in housing prices.

The collapse of the housing market was a key factor in driving the economy into recession, and its recovery is seen equally key to the economy's return to growth. Lower housing prices have contributed to high foreclosure rates, with cash-strapped borrowers unable to sell at prices that allow them to pay off their mortgages.

Abby Joseph Cohen, senior investment strategist at Goldman Sachs, said the rising interest rates showed that investors are becoming less risk averse as worst-case scenarios for financial markets and the economy have not played out.

"As we move back to normal, money would naturally come out of Treasuries and into other assets," she said, adding that part of the move is "a vote of confidence in the economic future."

By contrast, fears of high inflation are "spectacularly premature," Cohen said. "We just don't see that inflation is going to rear its ugly head."

She cited low capacity utilization of U.S. businesses, a high jobless rate and stagnant wages -- a major cost of business -- as evidence that inflation is not a worry.

Several Federal Reserve officials have recently talked at length about the threat of inflation. They say the U.S. central bank needs to start reversing monetary policies undertaken to loosen crippled credit markets, including rock-bottom interest rates, as soon as feasible.