June 30 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan's strategy of telegraphing interest-rate policy may be contributing to the falling long-term bond yields that are undermining his efforts to slow the economy, some economists say.

The Fed today is expected to raise its main rate by a quarter point to 3.25 percent, according to Bloomberg News surveys of 93 economists and of the 22 primary dealers of U.S. government securities. The dealers also expect the Fed to signal that its short-term rate will keep rising at a ``measured'' pace, continuing Greenspan's policy of providing greater transparency in its decision-making processes.

``Policy making is much more open than it was several years ago, and this has taken a lot of the risk premium out of the market,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi in New York. ``The Fed's measured, predictable rate hikes are reinforcing the yield curve's flattening trend.''

The Fed's communication strategy ``is one of several factors contributing to a `low-range' mentality in the market,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Inc. in New York. The language reinforces the idea ``that the Fed will never shock the markets, hence lower risk premiums.''

As the Fed's Open Market Committee tripled its main rate starting in June 2004, the yield on the 10-year Treasury note fell to 3.98 percent yesterday from 4.69 percent. The 10-year rate directly affects the economy by influencing business and consumer lending, and it pulled down the rate on a 30-year fixed mortgage to 5.57 percent from 6.32 percent.

Headaches

Falling long-term rates are causing headaches for the Fed. As the central bank tries to apply the brakes to the U.S. economy in order to curb inflation, consumers have been taking advantage of low rates to tap the equity in their homes, raising spending.

The amount of home equity extracted and not reinvested in housing rose by $202 billion in the 12 months ended in March, according to research by Elisabeth Denison, an economist at Dresdner Kleinwort Wasserstein in New York.

``We already know that money wasn't saved,'' she said. ``It went right into other forms of spending.''

Greenspan acknowledged June 9 that falling long-term rates are fueling the economy. ``The consequence of that is we've had a very strong housing market,'' he told Congress's Joint Economic Committee.

Greenspan in February called the flattening yield curve a ``conundrum.'' He has since considered and dismissed as inadequate several explanations for rising bond demand. These include purchases by Asian central banks, growing interest from pension funds and the rise of globalization, which has lowered barriers to the flow of goods, people and money.

Poole's Concerns

Some FOMC members, including St. Louis Fed Bank President William Poole, oppose the Fed's forward-looking statements because they can limit the committee's flexibility.

In a June 14 speech, Poole cited the communication strategy as one reason why long-term rates haven't risen as much as expected. Though long-term yields rose in response to previous Fed rate increases, ``the past year has not repeated this phenomenon because the Federal Reserve indicated its tightening intentions well in advance and because the economy has performed as expected,'' Poole said.

In past years, the Fed would sometimes use the element of surprise to obtain desired reactions. On Nov. 15, 1994, with the economy growing at almost 5 percent, the Fed unexpectedly raised its main interest rate by three-quarters of a point to slow the expansion. ``We are behind the curve,'' Greenspan said, according to a transcript of the meeting. ``Creating a mild surprise would be of significant value.'' Bond prices fell by the most in two weeks.

Forward-Looking

The Fed introduced forward-looking policy statements in August 2003. The FOMC had cut its main rate two months earlier to 1 percent, the lowest since 1958, to spur the economy and head off deflation. With the benchmark rate so low, there was little more the Fed could do to spur the economy except to say rates would stay low for a ``considerable period.'' In May 2004 it changed its language, saying in its statements that rates would begin rising at a pace ``likely to be measured.''

In another move toward greater transparency, the FOMC voted in December to begin releasing the minutes of its meetings after three weeks, instead of six weeks. That means investors now see the minutes -- and thus gain more insight into policy makers' thinking -- prior to the next monthly meeting. The Fed also, in February, extended to two years from one the forecast in its Monetary Policy Report of where it sees the economy heading.

Policy Potency

Former Fed Governor Ben Bernanke says that communication can help the central bank influence long-term rates. ``Much of the potency of monetary policy lies not in the FOMC's ability to affect today's federal funds rate but rather in the committee's ability to influence market expectations about future policy'' regarding ``the economically more relevant long-term rates,'' Bernanke said last October.

Bernanke, now chairman of President George W. Bush's Council of Economic Advisers, is a potential candidate to succeed Greenspan as Fed chairman; Greenspan, 79, is due to retire Jan. 31, 2006.

As the yield curve flattens, the FOMC may find that it needs to raise the benchmark rate more than it first thought to get longer-term rates to respond, said Catherine Mann, an economist at the Institute of International Economics in Washington. ``If you got more bang for the quarter-point buck in terms of adjustments of economic activity, you wouldn't have to move so much,'' she said.

``The yield curve is flat in part because people just don't see a lot of risk in extending out,'' said Brian Sack, a former Fed economist now at Macroeconomic Advisors LLC in Washington. ``It reflects that the Fed will do a good job keeping inflation low, and that the Fed is acting in a measured way.''

To contact the reporter on this story: Alison Fitzgerald in Washington at afitzgerald@bloomberg.net

Last Updated: June 30, 2005 00:04 EDT