Interest Rate

Abstract (Summary)

"I fear this overemphasis on deflation is going to ultimately lead to excess in inflation. Therefore, we seem to be borrowing from the future to benefit the present with this extremely low interest rate," said [Robert Dauffenbach], associate dean for research at OU's Michael F. Price College of Business.

Public comments from Fed officials have prompted the markets to anticipate the effect of the expected rate drop into stock prices, [Jeff Blumenthal] said. And another drop in the already low benchmark rate likely will have little effect on consumer or business spending, the driving forces behind a robust economy, Blumenthal said.

In a USA Today survey of 67 economists published Monday, 92 percent said they think Fed officials will cut their target for short-term interest rates, but 44 percent of the economists said they would vote to keep interest rates unchanged. Like Blumenthal and Dauffenbach, they said the economy is showing signs of improvement and too much stimulus could provoke inflation.

The Daily Oklahoman. Distributed by Knight Ridder/Tribune Business News.
To see more of The Daily Oklahoman, or to subscribe to the newspaper, go to http://www.newsok.com

Jun. 24--Some local financial experts are less than enthusiastic about the U.S. Federal Reserve's anticipated decrease of a key interest rate to its lowest level since the late 1950s.

Fed Chairman Alan Greenspan and other members of the Fed's rate- setting panel have expressed concern the economy could be threatened by deflation -- a widespread decrease in price levels that hasn't been present since the Great Depression.
The interest-rate setting committee meets today and Wednesday, when its new cuts in the federal funds rate are expected.

The Fed's benchmark short-term interest rate is at 1.25 percent, a 41- year low. The panel has cut the rate only once in the past 18 months after 11 rate cuts in 2001.
University of Oklahoma economist Robert Dauffenbach said the Fed's anxieties over potential deflation may be overwrought.

"I fear this overemphasis on deflation is going to ultimately lead to excess in inflation. Therefore, we seem to be borrowing from the future to benefit the present with this extremely low interest rate," said Dauffenbach, associate dean for research at OU's Michael F. Price College of Business.

It is widely expected the Fed will reduce the rate again Wednesday by either one-quarter of a percentage point or perhaps as much as one-half point. At either 1 percent or 0.75 percent, the funds rate would reach a level not seen since 1958.
The Fed theoretically could cut the funds rate to zero. Many analysts believe, however, that 0.5 percent would be as low as this benchmark for short-term interest rates could go without jeopardizing the ability of money-market mutual funds to cover operating expenses and still pay a return to fundholders.

The Fed panel issued an unusual statement at its May 6 meeting that said "the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level."
To financial markets, that statement was a clear signal the central bank was more worried the weak economy could push the country into acute deflation for the first time since the disastrous 1930s.

But Dauffenbach said further rate cuts could spur inflation that could become a problem within two to four years.

"My feeling is they've done enough. The economy just needs time to heal and establish a base for moving forward," he said.

The best way to boost Oklahoma's economy, Dauffenbach said, is to bring about a recovery of the national economy and stabilize business sectors such as airlines and telecommunications that have been hardest hit by the slow-down.

Greenspan's comments about controlling energy prices also seem to be at odds with his concerns about falling prices, Dauffenbach said.

"That to me sounds like inflation, not deflation," he said.

The Federal Open Market Committee, which sets the benchmark interest rate, appears to be reacting to the volatility of the financial markets, Dauffenbach said.
"My feeling is there is too much manipulation going on," he said. "They're potentially creating a moral hazard where financial markets believe the Fed will always come to the rescue."

A local investment expert said he anticipates a muted response from financial markets to Wednesday's announcement.

"I think it will be surprisingly neutral," said Jeff Blumenthal, senior vice president for investments at Prudential Securities in Oklahoma City.

Public comments from Fed officials have prompted the markets to anticipate the effect of the expected rate drop into stock prices, Blumenthal said. And another drop in the already low benchmark rate likely will have little effect on consumer or business spending, the driving forces behind a robust economy, Blumenthal said.

"I think things have already turned the corner and the economy is on the mend," Blumenthal said. "I think that mending cycle will continue, but not because another quarter-percent or half-percent drop in interest rates."

Blumenthal predicted that markets will decline after the rate- setting panel announces its decision Wednesday.

In a USA Today survey of 67 economists published Monday, 92 percent said they think Fed officials will cut their target for short-term interest rates, but 44 percent of the economists said they would vote to keep interest rates unchanged. Like Blumenthal and Dauffenbach, they said the economy is showing signs of improvement and too much stimulus could provoke inflation.

Blumenthal said the historically low rates have prompted some investors to anticipate higher interest rates and avoid putting money into bonds, which yield less as interest rates rise. But that's just the kind of market-timing method that burned many individual investors when the stock market bubble burst at the end of the 1990s, he said.

"To me, the right thing to do is to have an investment plan and stick with it no matter what the stock market does and no matter what interest rates do," he said.