Personal Armchair Analysis - I think they've lowered rates too much but for a different reason. People that save money (mostly senior citizens) are losing their discretionary income. They've got there savings in CDs and money market accounts which are basically earning nothing now. Most people that could refinance there homes have already done so. Lower interest rates are having a negative net impact on the economy. I personally have withdrawn everything from the money market because I'm disgusted with the return.

08/15 16:59 Fed May Have Lowered Rates Too Much: Rates of Return (Update1) By Liz Goldenberg

New York, Aug. 15 (Bloomberg) -- The Federal Reserve, which is expected to lower interest rates for a seventh time this year when its policy-making committee meets next week, may have already done too much.

That's the conclusion of some investors and analysts, who are concerned the central bank's actions will ignite inflation. The Fed has cut its overnight lending rate 275 basis points, to 3.75 percent from 6.50 percent.

The yield on the 30-year Treasury bond is now higher than where it began the year. On Jan. 1, the bond yielded 5.46 percent. Today, it yields 5.51 percent. Investors don't buy bonds when they believe inflation, which erodes the value of future coupon payments, is a threat.

``With everybody trying to stimulate the economy, the Fed by its rate cuts and the Treasury through the tax rebates, there is a lingering concern that'' the combination may be inflationary, said Astrid Adolfson, a financial economist at MCM Moneywatch, a research firm.

While many companies in the U.S., Europe and Asia are worried about lower corporate earnings, layoffs, and the possibility of global economic recession, the bond market is concerned the Fed's rate cuts will spur enough growth to spark inflation.

``The market, much to the Fed's chagrin, doesn't think these low rates are sustainable,'' said Gerald Lucas, a senior government bond strategist at Merrill Lynch & Co.

``Further, traders and investors are afraid of a Fed overshoot, and the effect that may have'' on bringing inflation back, ``even though none is in the pipeline.''

Rising Consumer Prices

Inflation, as measured by the consumer price index, grew at a 3.8 percent annual rate this year as of the end of June. The Bureau of Labor Statistics is scheduled to release its report for July on Thursday. Economists surveyed by Bloomberg News expect it to drop 0.1 percent, mainly because of falling energy prices.

Last spring, Wall Street was predicting the economy would turn around by the second half of the year. Now even the optimists are saying a real rebound won't begin until next year.

Yet bond investors aren't concerned. They ``don't appear to be excited about the depth or length of the economic downturn,'' said Frank Rachwalski, who as a managing director at Scudder, Kemper Investments in Chicago is responsible for about $40 billion.

``There is some latent concern that'' if the U.S. is experiencing ``only a modest slowdown, inflation could become a concern later next year,'' said Rachwalski.

Even though there is no sign of inflation now, there is a new concern: the dollar.

``The dollar's strength has been one of the most important constraints on inflation,'' said Josh Stiles, a senior fixed income strategist at IDEAglobal Inc., a research firm, who expects economic growth to rebound in late 2001 or early 2002.

``When you take that out of the equation,'' the outlook for more inflation isn't as clear, he said.

Expecting Growth

Yields on the Treasury's longest-term security indicate that traders and investors are pricing in economic growth. At the end of June, 36 economists surveyed by Bloomberg News predicted that gross domestic product would be 3.4 percent in the second quarter of 2002, up from expectations of 0.5 percent for the three-month period that ended on June 29.

If they are worrying about inflation and how fast the economy will recover next year, that is a sign that investors and traders think that the central bank's rate reduction cycle may be nearing an end.

The fact that long-term interest rates haven't benefited as much as short-term interest rates may be a signal that traders recognize ``the Fed rate cuts are short-run cyclical in nature and will be reversed,'' said Joe Tully, a managing director for Prudential Investment Management in Newark, New Jersey, who is responsible for more than $60 billion in money market assets.

The last time the central bank lowered interest rates before this year was in 1998, when it cut 75 basis points from its target. Policy-makers reversed course and began raising rates in June 1999.

Before that, the Fed lowered rates from July 1995 to January 1996, finishing when the target was at 5.25 percent. That level remained unchanged for 14 months.

In 1991, policy-makers reduced rates a total of 3 percentage points, the amount that economists and traders expect this Fed to complete with next week's move

-- Guy Daley (guydaley1@netzero.net), August 16, 2001

Answers

I agree with you armchair analysis. The rates for mortgages and consumer loans (credit cards) did not fall with the savings rates, so consumers got hit with a double whammy.

Maybe Greenspan figured that if bank rates dropped so low that peole with fixed incomes would have to go back into the stock market to make a cecent return? I don't think that Greenspan knows what he is doing when it comes to the stock market. He got lucky in the 1990's. He got credit for doing something that was going to happen anyway.

-- K (infosurf@yahoo.com), August 16, 2001.