Rejoinder. (response to by Frances H. Schott in this issue, p.38)

Francis Schott's comment on my paper makes two points in opening a discussion of the influence of interest rates on future economic activity. The first point is that I err in asserting that many or most economists believe that the main influence of interest rates on future economic activity is exerted by long rates rather than short rates. In essence, the comment argues that the majority view is that all rates matter.

At first glance, this seems a difficult position with which to disagree. But as posed in the paper, the real question is which rates are judged the major influence on those occasions when short rates and long rates do not move in the same direction. The paper provided a number of quotations, notes that long rates are included in leading indicators of economic activity, and details forecasters' expectations in early 1986, all of which support the interpretation that long rates are considered the dominant influence. This interpretation was recently reinforced, when both New York Times and Wall Street Journal editorials urged the Fed not to raise the fed funds rate …