September 22, 1998

The question on most peoples minds (now that videotape has answered the other big puzzle) is where the U.S. economy is heading. The jittery stock market, reacting in hundred-point jumps to new revelations out of Washington, the Russia collapse and further weakening in the emerging markets, has analysts and investors guessing about the outlook for the financial markets. We believe interest rates hold the key. The flight to quality and global margin call of recent weeks will have a significant effect on the future path of the U.S. economy. The actions of monetary authorities, particularly in the U.S., will also affect the outlook. To interpret the causes and consequences monetary movements will have the global and U.S. economies, a framework is needed to analyze the current situation and sort out the likely outcomes of various options available to policy makers--and also to assess the likely course of action. Only with such a framework can we make an informed conclusion about the likely path of the economy and the markets.

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