Interest Rates Are Seen Pushing Higher Even When Economic Slowdown Appears
NEW YORK -- Interest rates are likely to push higher even when the long-awaited slowdown in the economy finally appears, according to many bankers and economists.</br></br>The Federal Reserve System will keep a tight grip on credit in coming months to underscore its determination to hold the line on inflation, these analysts said. Furthermore, they said, businesses will borrow heavily to finance new equipment and the construction of new plants.</br></br>"We can't see a fundamental turn in interest rates without an abatement in the explosion" of business borrowing, said Wayne Lyski, a vice president of Alliance Capital Management Co., an investment manager. And that isn't likely, he contended. "The single biggest negative in the bond market continues to be an escalation in credit demands."</br></br>Many investors have been hoping that slower economic growth will lead to less borrowing and lower interest rates. But those hopes are misplaced, argued Edward Yardeni, senior vice president and economist of Prudential-Bache Securities Inc.</br></br>"History shows that slower economic growth is associated with rising credit demands, not falling credit demands," Mr. Yardeni said. Yields on long-term Treasury bonds, currently at about 12 3/4%, are likely to surge to 14% by January, he predicted.