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Greenspan Casts Doubt on Import Of Falling Rates

Contributed by mm | June 7, 2005 6:48 AM PST





A weaker economy is the only plausible conclusion Mr. Greenspan can make right now.

From Wall Street Journal:

"One prominent hypothesis" for the decline, Mr. Greenspan said, "is that the markets are signaling economic weakness. This is certainly a credible notion." He then cast doubt on it, by noting that "periodic signs of buoyancy" in some parts of the world haven't stopped the decline.

A weakening economy often brings about lower long-term interest rates because it reduces inflationary pressure and demand for credit and leads to inferior returns on competing investments such as stocks. Historically, a decline in bond yields to, or below, the short-term interest rate set by the Fed -- called an "inverted yield curve" -- has been a precursor of economic slowdown or recession. Since the spread between short and long-term rates has narrowed to less than one percentage point from almost three percentage points in the last year, some analysts predict the yield curve will invert.
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