NEW YORK -- Credit market analysts and economists say the precipitous decline in short-term interest rates engineered by the Federal Reserve Board over the last 18 months should begin to pay some dividends for the economy in the second half of this year.
Few of them, however, expect much more than a tepid rebound. If they are right, short-term rates will stay low, and bond yields, which remained stubbornly high through much of 1991, will probably fall.
But economic recovery, these people acknowledge, has been widely seen as being just six months away for the last three years. And there are enough uncertainties to jeopardize even a modest improvement.
Nevertheless, guarded optimism prevails.
"The prospects for the economy are much better, because rates are down and we have already been through a lot," said Edward J. Hyman, president of International Strategy and Investment, a New York investment advisory firm.
Inflation, the scourge of the fixed-income market, has fallen nicely over the last year and is showing few signs of reviving. And while the worry of rising unemployment continues, the pall of an impending war does not.
Since July 1990, the Fed has lowered its target for the overnight rate on bank loans in the federal funds market by 4.25 percentage points, to 4 percent. In response, other short-term rates have fallen and now stand at levels not seen since the late 1960s, when inflation was tame and federal budget deficits were not a problem.
That short-term rates have fallen so far has been a big surprise to many analysts. So, too, is the fact that the rate moves have not yet rekindled economic growth.
But given the problems in the nation's financial system -- difficulties that have transformed what might otherwise have been a traditional recession into something altogether different -- economists shudder to think what might have happened had short-term rates not come down.
The efforts to work off the excessive debt incurred during the 1980s are only 1 year old. Many economists now say that short-term rates may need to fall a bit further during 1992 and remain at the new levels for the rest of the year if balance sheets are to be further repaired.
Compared with the drop that has already taken place, further declines in short-term rates will be minimal, analysts agreed.