>. That means that the long rate can only fall relative to the
>current short rate if expected short-term rates are falling. That is, the
>long rate can fall relative to the federal funds rate only if people
>expect
>the Fed to loosen up in the future (increasing the supply of funds) or
>the
>demand for funds to fall (perhaps due to a recession). Alternatively, the
>fall in long rates could be seen as temporary.
Isn't it also possible that the long-rate can fall because the economy
is slowing, while the short-rate remains high because that is
controlled by the Fed? I mean long-rates are set by supply
and demand, so a decline in demand will pull the rate down.
Right now, it seems, the decline in demand is coming from the
US Treasury, but I recall that in 1994, long-rates fell because
borrowers couldn't pay the higher rates established when
the Fed tightened. On the other hand, the Fed has pretty
tight control over the short-market, so that rate isn't really
market determined.
Ellen
Jim writes:
...
>then the fall in the long rate
>also won't have any big effect on borrowing for business fixed
>investment,
>reinforcing Michael's point. (I'm thinking that a lot of the new debt
>that
>a business investor would take on would have variable rates, so that a
>temporary dip in the long rate wouldn't have a big effect.)
>
>Alternatively, monetary policy (tomorrow's hike) and fiscal policy
>(buying
>back long-term government debt) are working at cross-purposes. That would
>help explain why Greenspan isn't succeeding at slowing the US economy.
>
>does this make sense?
>
