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A punch bowl made in China – LA Times Editorial

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From the Los Angeles Times (free registration required):

A FORMER FEDERAL RESERVE CHAIRMAN once famously said it was the central bank’s job to “take away the punch bowl when the party is warming up.” That’s precisely what Alan Greenspan and his colleagues at the Fed have been doing for more than a year now, as they have gone about methodically raising the overnight federal funds rate from 1% to 3.5% ” with Tuesday’s quarter-point move marking the 10th increase since June 2004.

But these moves haven’t been putting that much of a damper on the party. Long-term interest rates have not risen in tandem with short-term rates; oddly enough, long-term rates are lower than they were before June 2004. The convergence of short-term and long-term rates usually signals a recession (when there is little demand for investment capital driving up long-term rates), but in this case there is a different explanation for the Fed’s failure to nudge long-term rates higher. Quite simply, China is supplying a punch bowl to keep the party going.


© Sophie Beach for China Digital Times (CDT), 2005. | Permalink | No comment | Add to del.icio.us
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