Despite recent evidence that the red-hot economy has cooled, top Wall Street analysts say a slackening of interest rates, cutting the cost of everything from mortgages to corporate borrowings, may open the door to a resurgence in growth.

"They are now no tighter than they were before the Fed began tightening interest rates last June," said Bill Dudley, chief economist at investment bank Goldman Sachs and Co. Any return to the exuberant economic growth of late 1999 or early 2000 would heap pressure on the Fed to tighten credit costs further as it desperately seeks to curtail demand growth and prevent inflation-stoking overheating. "From the beginning of last year until recently you had an increase in private sector borrowing costs such as corporate bond yields and mortgage rates. In other words, the market was doing most of the Fed's work," said David Jones, chief economist at Aubrey G. Lanston & Co. "But recently, in the last month or so, these rates have dipped down, mainly because of perceptions that the economy was slowing due to higher borrowings costs before," he said.

The Fed has acknowledged that its monetary armory is often a blunt weapon in the fight to control economic activity. As a result, it relies on various financial market transmission mechanisms to effect policy.

One of the main channels typically influenced by Fed rates is the cost of private sector lending to corporations. In March, Fed chairman Alan Greenspan cited the rising yields on triple-B rated corporate paper as good evidence that the central bank's credit tightening was succeeding in constraining excess demand in the economy.

But rates on medium-term triple-B rated debt have fallen in recent weeks and are now lower than they were last June when the Fed began raising rates. Last week, these bonds were yielding an average of 7.91 per cent vs a high this year of 8.49 per cent and against 8.03 per cent last June, according to Moody's Investors Service.

Lehman Brothers compiles an index of top 20 issuers of high-grade corporate debt and by mid-July, the average 10-year yield was down to 7.76 per cent from 8.35 per cent a month earlier and against 7.20 per cent in mid-1999.

In a further sign of a slackening in the financial market straitjacket, stock markets have also rallied in recent weeks, led by a snapback in technology shares with the key Nasdaq index up 25 per cent since mid-May.

-- (Reuters)Goldman Sachs' Dudley said financial conditions had clearly become more favourable to growth in the last six weeks.The firm's Financial Conditions Index - which measures a number of economic variables including short and longer-term private lending rates, the trade-weighted value of the dollar and share values, was at 96.43 by last Wednesday vs 97.23 in May.US consumers pushed their credit purchases up during May at the strongest rate in four months, taking out more new-car loans, data released by the Fed last week showed.Consumer installment credit surged $11.8 billion, at a 9.8 per cent annual rate, following a revised $8.8 billion increase in April. The May rise far outstripped Wall Street analysts' forecasts for a $7.4-billion gain and was the strongest pickup in monthly credit since a $15.73-billion rise in January.Another key consumer credit indicator, the average 30-year mortgage rate, fell last week to its lowest level since the end of last December, hitting an average of 8.09 per cent compared to 8.16 per cent the previous week.A year ago, 30-year mortgage rates averaged 7.58 per cent.Financial markets as measured by futures contracts traded on the federal funds contract are evenly split on whether the Fed's policy making Federal Open Market Committee will raise its bellwether interest rate on overnight lending between banks to 6.75 per cent at its Aug 22 meeting. The rate now stands at 6.5 per cent.After six hikes in just over a year, the Fed skipped raising rates last month, though it noted it still saw risks in the economy still tilted toward higher inflation, indicating more increases could be in the pipeline.Economists said Greenspan may use the forum of his semi-annual assessment of the US economy before Congress, scheduled for Thursday, to try and jawbone financial market conditions tighter once more."The key thing for the Fed is whether the slowdown is permanent or temporary. This means whether corporate borrowing costs are high enough, and can they stay high enough, and can the stock market stay in a correction long enough to curtail demand growth," Jones said."This is a reason why Greenspan may turn out to be more hawkish than we previously thought," he added.(Reuters)