THE FED WONT RAISE INTEREST RATES… AT LEAST NOT YET
It’s always best to start looking at the stock market from the outside when it comes to interest rates. You’ve probably heard that interest rates and stock prices sit on opposite ends of a seesaw. The minute the Federal Reserve–the government agency that monitors both ends of that precarious balance–raises rates, money comes pouring out of the stock market and into bonds. Bonds, after all, pay a set, regular yield that investors find to be relatively risk-free. Stocks, meanwhile, are prone to go up and down in value, offering potentially greater return to investors, but they’re riskier sources of wealth.
What’s the Fed up to now? At one point late in 1997, Fed Chairman Alan Greenspan seemed to tip his hand by intimating that in his opinion stock prices could be drifting far too high. Dail St. Claire Simmons, our fixed-income expert, says the Fed has indeed gotten a bit fidgety, but probably won’t tinker with rates. Meanwhile, with the U.S. government running on a tight budget, and borrowing less money as a result, interest rates should continue to fall. But one panelist, Randall Eley, thinks inflation might soon perk up enough to get the Fed a little more than concerned.
DAIL ST. CLAIRE SIMMONS: We started the year with the 30-year Treasury–the bellwether of the bond market–at a yield of roughly 5.90%. Rates have come down to 5.60%. We’re expecting them to fall as low as 5.25% by year-end. We continue to live with a vigilant Fed, however. It’s attuned to keeping economic growth at a reasonable rate without prompting higher inflation. We believed, in fact, that the Fed was actually going to raise rates last year, before the Asian crisis slowed the economy down.
WILLIAM ROACH: They [the Fed] really can’t afford to raise rates because it’s not dear how long the Asian crisis will last and what effect it will have stateside. Tighter monetary policy in this kind of environment could damage the economy. I think they have to remain, at best, neutral at this stage.
ST. CLAIRE SIMMONS: Inflation, meanwhile, seems pretty tame. Even with employment numbers rising-usually a sign that inflation might rev up a bit–prices haven’t jumped much. The wage gains that might have pushed inflation have been offset by productivity advances, thanks to technology. And moderate inflation will probably keep the Fed on the sidelines. Further out, meaning 1999, the economy may slow to the point that the Fed might ease rates.
RANDALL ELEY: Over the short term, we should see the Federal Reserve and, for that matter, all other political authorities, take a hands-off approach to the markets because we’re entering election season. There seems to be an understanding that no one, not even the Fed, will take any action that’s deemed to be interference in the elections, so I can certainly see this market-friendly environment continuing until the first part of November. Afterward, the Fed will probably be more willing to act upon its concern