June 22, 2001

The expected decline in interest rates is consistent with a 50 basis point rate cut by the Fed. The expected decline in interest rates induces a delay in the purchases of consumer durables. However, once the interest rate trough and rates are expected to rise, economic activity will pick up. The expected path for interest rates suggests that the trough in real GDP growth is at hand. The last quarter suggests that the economy and the markets are looking for positive news to react favorably. When the budget resolution was approved, which assured that the tax bill would go through, the market roared. However, once the Jeffords defection was announced the market gave up a lot of the recent gains. If the Fed returns to its price rule commitment and lowers rates as expected, the markets will strengthen and the negative impact of the wealth effect will weaken.

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