I wrote:
> > 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.
Ellen writes:
>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.
It's possible. Is the demand for long-term credit falling? is the economy
slowing?
I checked out recent issues of Dave Richardson's daily newsletter to find:
>The pace of the U.S. industrial sector cooled considerably in February,
reflecting a moderation in manufacturing as well as a drop in mining
activity, according to figures from the Federal Reserve. Industrial
production -- combining activity in factories, mines, and utilities --
advanced 0.3 percent seasonally adjusted in February, a marked slowdown
from the unusually strong 1.1 percent jump in January. ... (Daily Labor
Report, page D-1)_____U.S. industrial production rose less than expected in
February, a slowdown that may be short-lived as lean inventories suggest
factories will stay busy in coming months. Analysts, who had been
forecasting a 0.6 percent increase, said they doubt the report signals the
economy is slowing after four interest rate increases by the central bank
since last June (Washington Post, page E1; New York Times, page
C30)_____Cooling off a bit after one of its sharpest increases in recent
memory, industrial production grew at a less than expected 0.3 percent in
February. But output at U.S. factories, mines, and utilities remained at
sky-high levels. ... (Wall Street Journal, page A2).<
further, the industrial sector isn't as important to employment as it used
to be.
I don't have the time to sift through all of Dave's evidence. Is there any
evidence that aggregate demand is slowing?
Jim Devine [EMAIL PROTECTED] & http://liberalarts.lmu.edu/~jdevine
