Newspaper article The Christian Science Monitor

High Interest Rates: A Who-Dun-It?

Newspaper article The Christian Science Monitor

High Interest Rates: A Who-Dun-It?

Article excerpt

WHAT'S responsible for this year's interest-rate hike?

Bond yields since year-end are up 1-3/4 to 2-1/2 percentage points overseas. Domestic bonds moved in the same direction, with a rise of more than a point in government Treasuries. The Wall Street Journal asks: "For 75 years, the Federal Reserve took the blame for rising interest rates. Now it can more easily pass the buck. What's going on?"

Global capital demands are not to blame.

But Fed governors and private commentators are indeed busy turning the finger of suspicion away from Washington. In January congressional testimony, Chairman Alan Greenspan cited "stronger-than-expected economic data, a run-up in energy prices, and increasingly attractive investment opportunities abroad." Uncertainty about the economic side effects of German reunification was great, he said, and markets may have overreacted. After several more weeks of rising rates, he began to identify the source of the rate hike as global: the capital demands of converting most of the communist world to a market economy.

"This is an extraordinary change in the nature of the world's savings and investment which I don't think has any historical precedent, certainly not in the last 40 years.... "

Mr. Greenspan's thoughts were echoed at the same hearing by Michigan Sen. Donald Riegle (D):

"I don't see how the United States is going to be able to go out and grab the same share of the international savings pool, now that we've got a big new competitor in terms of Eastern Europe, without having to pay a higher price for it."

The word is out that the Fed has less power to control interest rates now that markets have gone global. For Lyle Gramley, the Fed's chief economic forecaster during the 1970s, this was a complete surprise: "Whoever thought that developments in West Germany were going to be a very important influence on interest rates in the US? Maybe somebody did. It wasn't me."

At first glance, global markets offer an alibi to central bankers in Washington, London, and elsewhere. …

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