The alternative, he said, could be a worldwide recession set off by the spread of the economic crisis to Latin America. Such a recession would probably lead to a more dangerous decline in prices known as deflation. The sharp drop in interest rates has helped offset the economic drag from the financial turmoil in Asia, Russia and Latin America. Thirty-year mortgage rates are below 7 percent and should go lower. But the benefit of lower interest rates is not being spread to all consumers or companies, which means there is much more of a drag on American growth than the drop in Treasury yields indicates.
Consumers still face much higher interest rates on credit cards and other types of borrowing.
In addition, the decline in the borrowing rates for corporations has not fallen as sharply as Treasury yields. And the cost of borrowing for less creditworthy companies is rising. Ford Motor Co. announced Thursday that it would not proceed immediately with a new bond issue, in part because yields on corporate bonds have become less attractive.