Financial Watch

Senate Democrats staved off an attempt by Republican lawmakers Wednesday night to reduce the maximum interest rate the federal government can charge on loans to student borrowers, keeping intact its overhaul of the college lending market.

The Democratic plan would see private lenders banned from originating student loans and replace them with the federal government making all loans.

Sen. Lamar Alexander (R., Tenn.), an opponent of the student lending overhaul, introduced the measure on the Senate floor Wednesday. It would lower the maximum rate of interest the government could charge on loans to 5.3% from 6.8%.

DISAPPOINTING TURNOUT: Interest rates jumped in the bond market Wednesday after a government debt auction drew weaker demand. An auction Tuesday also saw lower demand.

NOT THAT INTERESTED: The auction of $42 billion in five-year notes saw demand fall from the past two months. That means the government could have to start offering higher interest rates to attract buyers.

LUCKY NUMBER SEVEN: The government plans to auction $32 billion in seven-year notes on Thursday in the final auction of the week. The yield is higher on the seven-year note. The sale could draw more investors.

The economic outlook for Australia appears considerably brighter than that for the other advanced economies and it is likely that interest rates will need to continue their gradual move towards “more normal levels”, Reserve Bank of Australia assistant governor Philip Lowe said on Thursday.

“With the economy having relatively limited spare capacity, it is likely that interest rates will need to continue their gradual move towards more normal levels,” he said at an event in Sydney.

Lowe said that he expects to see Asian economies continuing to grow solidly in the months ahead, but expects growth in the advanced economies to remain subdued.

Wall Street cheered news that the economy has slowed to a 2.5% clip during the second quarter of 2006. The headline number sounds great for those pulling for the Federal Reserve to pause in August, but just about everything else in the report was a disaster. Traders focused on news of a slowing economy to push stocks up last week. Considering inflation picked up more than expected in the second quarter, it is somewhat confusing why the markets rallied on such news. But there was something else in the back of trader’s minds that allowed them to bid prices higher. Early last Ben Bernanke stated he believed that evidence we are seeing of a slowing economy would eventually cause inflationary pressures to cool. Predictions of another hike in interest rates fell precipitous last week as continuing signs of slowing economic growth opened the door for the Fed to pause in August.

Treasury yields on the U.S. ten year note surpassed 5% for the first time since 2001 this past week. This marks the first time in years when investors are able to obtain a higher yield from the bond markets than can be obtained through the stock markets. Although 5% is still a comparatively low return in comparison to the strong returns that can be realized through equity investments, it marks the point where U.S. treasuries offer a sufficient return to attract investors from the stock markets. In recent months, U.S. stock markets have rallied nicely from their lows following Hurricane Katrina last fall. Fears of higher commodity prices and rising interest rates have caused a modest pullback. It appears the pullback will be short lived. Economic growth is strong at the moment and inflation is under control.

Momentum on Wall Street is building that the Federal Reserve is going to strongly consider ending the on going series of interest rate hikes at its next meeting later this month. Since 2003, short-term interest rates have risen from a historical low of 1% to the current 4.5%. In January, the FOMC shifted its message to state that interest rate decisions would be made based upon incoming data. Although economic data presently shows our economy is growing at a strong clip, there is growing concern over froth in the housing market. Most believe the downshift in the nation’s housing market will occur in an orderly manner. However given current economic conditions the Federal Reserve faces little risks of sparking inflationary pressures if it acts cautiously in raising interest rates.