Prospect of One Currency in Germany Likely to Boost Short-Term U.S. Rates
WASHINGTON -- The decision of West and East Germany to begin talks as early as next week on a common currency may only add to Alan Greenspan's problems.</br></br>The prospect of swifter German monetary and economic integration is likely to lead to greater upward pressure -- at least in the short-term -- on German and even U.S. interest rates, economists say, because of increased fears of higher inflation in West Germany. Such pressure on U.S. rates would be compounded by the tight monetary policy of Japan's new central bank governor, Yasushi Mieno.</br></br>That is a disappointment for the Bush administration, which in recent weeks has tried unsuccessfully to jawbone the Federal Reserve Board into cutting short-term U.S. interest rates.</br></br>"Inflationary pressures will come up somewhat {in Germany}; it will be difficult for German interest rates in the short term," said Werner Becker, an economist at Deutsche Bank's Frankfurt headquarters, discussing the outlook for his country's interest rates in the light of next week's meeting on monetary union. "There will be a certain pressure on the dollar exchange rate and even on the interest rates," Mr. Becker added.</br></br>In testimony to a congressional panel late last month, Fed Chairman Greenspan said that rising interest rates in Europe and Japan are causing significant amounts of capital to be diverted from the U.S. The results of this diversion are clear in the bond market. "We're seeing some pressure in the longer end of the {U.S.} bond market," Mr. Greenspan said. The U.S. needs foreign capital to finance its large current-account and federal budget deficits.