This isn't the way it was supposed to be

Posted: Thursday, September 07, 2000

NEW YORK (AP) -- In the past 15 months the Federal Reserve has raised interest rates six times to slow the economy, which it believes was bound to burn itself out in the fires of inflation.

The rate increases may have helped tame inflation, and for this the Fed has been greatly applauded by members of Congress, private and public sector economists, talk show hosts, and top business leaders -- all of whom say that at least partially it achieved its goal.

But wait. Cars are still selling like the latest fad toy. Stocks are up. New home prices are rising. And consumers, spending more than they earn, raised their debts by $12 billion in June alone.

And those interest rates most people thought were still rising: Some have been falling, not rising, since late May, helping to explain all the borrowing going on. ''It's party time, or so it seems,'' says Ian Morris, an economist at HSBC Securities.

Morris lists some examples of what he's talking about:

--30-year fixed mortgages rates to the beginning of September fell to 7.96 percent, off from their peak of 8.64 percent on May 19.

--Moody's Baa corporate bond yield, which he calls the best reflection of U.S. corporate credit, dropped to 8.29 percent from 9.08 percent on May 18.

--Moody's Aaa corporate bond yield declined to 7.59 percent from 8.12 percent on May 18.

Party time? The numbers seem to tell a story of investors having had a pretty good time.

Morris points out that from its recent low of 1,373 on May 23 to the beginning of September, the Standard & Poor's 500-stock index has risen more than 10 percent; over the same period, the Nasdaq Stock Market rose 33 percent and the Dow climbed 8 percent.

What happened in May? Since its latest of six interest rate increases in less than a year, the Federal Reserve has refrained from further action. Many people assumed it was also the last in the series. Maybe not.

One explanation for the renewed enthusiasm (to call it renewed ''exuberance'' would be to wave a red flag in front of the Fed) is that its policies worked so well that demand slowed, relieving pressure on markets.

Morris suspects this thesis, largely because other statistical measures tend to contradict it. He does concede that economic activity slowed, but wonders how significant the slowdown has been.

His study of 23 monthly financial markets indicators leads to what he calls his Hot-Cold monthly indicator. And, he says, this indicator ''is showing little sign of meaningful slowdown.''

Morris concludes that there is a risk in celebrating the soft landing too early, and that the next move by the Fed is still likely to be toward higher rather than lower interest rates.

''Possibly in November or December,'' he says, ''given that October is a little too close to the presidential election.

End Adv PMs Thursday, Sept. 7.



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