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FEDERAL HOME LOAN BANK OF NEW YORK: LOW IN RATES CLOSE AT HAND

    FEDERAL HOME LOAN BANK OF NEW YORK: LOW IN RATES CLOSE AT HAND
    NEW YORK, Jan. 6 /PRNewswire/ -- The following was released today by the Federal Home Loan Bank of New York:
    The first quarter is likely to mark the low in interest rates for the year and perhaps for several years.  We expect the economy to begin a long, slow recovery in the spring and, by that time, an end to monetary policy easing.  In fact, once recovery is visible, we expect the Fed to promptly tighten just a step to remind everyone that it is still in the anti-inflation business.  Fiscal stimulus is more problematic.  We believe a recovery can get started without additional stimulus.  To the extent it seems likely that such programs will be passed, inflationary expectations would worsen and long term interest rates would rise, thereby undercutting the economic benefits of the stimulative programs.
    Central to the argument is the outlook for a recovery in the spring. We expect the impetus to come from housing, exports, manufacturing and, down the road, capital spending.  Consumer spending will be a small part of the recovery, which is likely to be slow.  The housing industry is already well positioned for a pick-up.  We expect to see an upturn in housing permits and starts in the first quarter.  As usual, housing is likely to lead the way in the recovery.
    A second important component of the forthcoming recovery should be exports and domestic production replacing imports of foreign goods. Steady erosion of the dollar over the last six months of 1991 should assure good foreign demand for American goods and replacement of imports by domestic production.  American goods are simply now more price competitive.  Since those goods for export and domestic consumption will have to be manufactured, we expect to see an early pick-up in industrial production.  That, in turn, should trigger rehires of manufacturing workers, followed by the usual ripple effects throughout the economy. Capital spending increases, although modest, should not be far behind. With all this going on, somewhere along the way consumer confidence is likely to start to recover, leading to somewhat more consumer spending. These sectors will have to be strong enough to overcome continuing weakness in governmental spending at both federal and local levels. Overall, we expect annualized growth rates in the second, third and fourth quarters in the 2.5-3 percent range.
    The Federal Reserve Board's Dec. 20 statement, when it lowered the discount rate by 1 percentage point, indicated that "This action, together with the cumulative effects already in train from previous actions, should provide the basis for a resumption of sustained economic expansion."  In other words, the Fed did not, at that time, expect to ease further.  At most, we would expect another 25-basis point reduction in short term rates within the next month or so -- at most.  If the economy begins a recovery in the spring as outlined above, we would expect the Fed to show its antiinflation resolve by tightening just a notch fairly early, perhaps in May.
    This scenario suggests that interest rates generally will bottom out sometime in the first quarter.  Since we do not expect a renewal of inflation -- indeed inflationary pressures should abate, as is usual early in the recovery -- we think that, trading volatility aside, intermediate and long term rates will probably stabilize while short term interest rates inch ever so slowly higher.
    -0-              1/6/92
    /CONTACT:  Eugene J. Sherman, senior vice president and chief economist of Federal Home Loan Bank of New York, 212-912-4605/ CO:  Federal Home Loan Bank of New York ST:  New York IN:  FIN SU:  ECO FC-OS -- NYFNS1 -- 6702 01/06/92 07:30 EST
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Publication:PR Newswire
Date:Jan 6, 1992
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