Falling Interest Rates Pour Cash Into Economy
If the rich get richer, then what do borrowers get?
In 1998, it seems, millions of debtors will get a break.
Bond traders have charged into the new year bearing a big gift: They pushed long-term interest rates to their lowest level in nearly 30 years. And short-term rates may follow.
"Declining rates most help people in their prime borrowing years," says James Chessen, chief economist at the American Bankers Association in Washington.
A boost for economic growth
But falling rates help virtually everyone by sparking broad economic growth.
Lower rates have already triggered a wave of mortgage refinancing, which frees up billions of dollars for consumer purchases. The last refinancing binge, in 1992-93, unleashed $40 billion and helped end the last recession, Mr. Chessen says.
Short-term rates, which shape many consumer loans, have not fallen nearly as much. But bond traders apparently see them dropping, too.
Bonds with five-year maturities last week traded with yields below the 5.5 percent federal funds rate (which banks charge each other on overnight loans).
Rate-cut coming from Fed?
This "inverted yield curve" signals expectations of a rate cut by the Federal Reserve.
"The credit market is beginning to price in a Fed easing," says Bruce Steinberg, chief economist at Merrill Lynch.
Bond investors expect a rate cut "pretty soon," says M. Cary Leahey of High Frequency Economics in Valhalla, N.Y.
More convincing, the economy is hinting it might need a break from the Fed. Financial crises in East Asia are already sapping economic growth and corporate earnings. (Earnings will be hurt by lower exports but helped by lower rates.)
Still, some analysts see rates rising later this year in line with the usual end-of-business-cycle trend.
"While Asia buys time on interest rates, it does not change the cyclical endgame," says Stephen Roach, chief economist at Morgan Stanley & Co. in New York.