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Interest Rates Should Stay Low, Economists Say

BARRING unexpected rapid growth in the United States economy, long-term interest rates - which are now close to 8 percent - should not rise enough in coming months to choke off the recovery, according to many economists. In fact, lower interest rates abroad should help put downward pressure on US interest rates.

Long-term rates have climbed about a half-percentage point this year, with 30-year Treasury bonds now yielding 7.87 percent. The rise reflects concern that inflation might revive in an expanding economy. In early March, five-year Treasury securities were at 6.75 percent, compared to 6.25 percent in mid-December.

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Many housing experts are concerned that if long-bond rates were to go above 8 percent, mortgage rates, which are currently just under 9 percent for many 30-year fixed-rate mortgages, could be pushed up, thus curbing home sales. A reduction in home sales would work against more vigorous growth in the economy.

The Federal Reserve Board has clearly been concerned about the disparity between short-term rates and long-term rates. Short-term rates have been running at around 3.75 percent. But a large difference between the two rates - what economists call a steep "yield curve" - can deter business loans that might help fuel economic expansion. Banks and other financial institutions are able to take deposits on which they pay the lower short-term rates and then invest the funds in "safe" 30-year Treasury bonds.

The Fed wants to see the yield curve squeezed. The US Treasury has proposed reducing the number of Treasury bonds to be sold and thereby possibly trimming the yield on new bonds. This could encourage financial institutions to loan more to business in their search for a greater return.

Federal Reserve Board chairman Alan Greenspan says the Fed might speed up its purchases of Treasury bonds, also reducing the supply of bonds available to private buyers, including banks.

The consensus on Wall Street is that long bonds will not go much over 8 percent in the months ahead. A projection by Blue Chip Financial Forecasts, published by Capitol Publications, Alexandria, Va., anticipates that 30-year Treasury bonds will hover in the 7.7 percent range through the first three quarters of 1992 and then rise to about 7.9 percent in the fourth quarter.

"We see the entire yield curve [representing both short and long rates] dropping down in the months ahead and then rising later in the year," says Sean McKenzie, an economist for Midland Montague Economics, an arm of Midland Montague Securities Inc. "We just don't see a lot of movement in long-term rates. And short-term rates should decline during the next few months and then inch up a little."

One Midwest brokerage house is also telling its clients that long-term rates are not expected to move up dramatically - certainly not enough to abort the recovery. "There's low inflation, the US dollar is strong compared to last fall, and our domestic interest rates are quite favorable, compared to Europe and Japan, where rates are falling," says an economist for the investment house.

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"Mortgage rates have moved up only about 50 basis points - from 8.4 percent to the current 8.75 percent," says Stan Shipley, senior economist for Shearson Lehman Brothers Inc. "That increase in mortgage rates hasn't cut into housing sales. If long bonds were to go above 9 percent, then we'd be worried. But if they stay in a range of anywhere from 7.5 percent to 8.10 percent, we're not concerned."

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