How to play volatile interest rates

DENVER, Colo. (MarketWatch) -- Several years ago it was easy to predict what rates were about to do. The economy was coming out of a recession. Interest rates were scraping 40-year lows (there was little room for them to go down) and it was easy to surmise that the general direction of interest rates was up.
Today neither the direction nor the magnitude of the change in interest rates is as clear.
The global economy is humming along at a nice rate. Inflation is rising (if you account for items like food and energy). Unemployment is at multiyear lows. Commodity prices are rising. Corporate margins are hitting all time highs and a lot more.
However, the bright colors start to fade quickly when you look at other economic data:
The decline in national real estate prices led to a meltdown in sub-prime mortgages, which in turn caused banks to tighten their lending standards across all risk spectrums.
Now, breathing and being able to spell your name (correctly) doesn't automatically qualify you for a loan. This alone will further the deterioration of the housing market.
Though the sub-prime loan defaults are the ones making headlines, the prime and near-prime adjustable rate mortgages that were originated since 2003, at much lower interest rates, are resetting to higher interest rates (an inflationary development), sucking discretionary income out of consumer pockets. And though consumers still have access to home equity loans, it is now a more expensive piggy bank as short-term rates have risen, and the growth of home equity has stopped with the housing market.