Will Interest Rates Continue to Rise?

Chart of the Week for July 23-29, 1999

Interest rates have risen sharply in 1999. The yield on the ten-year Treasury note, for example, has risen 1.17% between December 31 and July 22. Rising bond yields flow through to consumers in the form of higher rates for mortgages, consumer loans, and credit card debt. As a result, rising interest rates tend to dampen consumer spending and slow the economy.

In his testimony to the House Banking Committee on July 22, Federal Reserve Chairman Alan Greenspan gave no immediate signal that the Fed would raise interest rates for a second time in two months when Fed officials meet again on August 24th. He did assure the Committee that the Fed would act “promptly and forcefully” if economic data suggested signs of inflationary pressures. These pressures could come from increased wages due to a shrinking unemployment rate.

Fed officials also stated in their semi-annual report to Congress that they expect the U.S. economy to grow between 3.5% and 3.75% this year but to slow to between 2.5% and 3.0% next year. Lower economic growth would be expected to result in lower interest rates. As in previous testimony, Mr. Greenspan also reiterated his belief that the U.S. stock market may be overvalued with prices at unsustainable levels.

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