March 27, 2001

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 question is whether that trough will occur in the second or third quarter is hard to tell. However, if the Fed returns to its price rule commitment and the tax bill goes through, the market will rally before the improvement in the economy is evident. During this quarter the future of the tax rate cut is likely to be decided. Our model suggests that there is a slightly better than even chance that the equity market will outperform the fixed income.

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