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February 3, 1989
Though the Unemployment Rate rose .1% to 5.4%, NonFarm Payroll grew by an unexpectedly large 408,000. The bond market is reacting poorly to this morning's release, and mortgage discounts will increase accordingly.
In other data this week, December Single Family Home Sales rose .6%, December Construction Spending jumped 2.5%, December Leading Economic Indicators rose .6%, and Personal Consumption Spending rose a strong .9%.
The economy is still growing too fast, so after two weeks of ARMbashing, it's time for a little Fedwatching.
Chairman Greenspan spent the last week making public appearances in which he said repeatedly "the Fed will err on the side of excessive tightness rather than ease." Also, in most unusual commentary for a Fed Chairman, Greenspan took public responsibility for the rise in short term interest rates since last March.
The "jawbone" is a useful leadership tool: for a Fed Chairman, public resolve to prevent inflation can reassure the long term debt market. However, Greenspan's performance this week seems to me to be aimed at the Congress and White House, saying "Look, people, here comes tightening: don't say later that I didn't tell you so."
There is a policy meeting next week of the key Governors of the Fed, and I suggest that you keep an eye on fed funds for the next ten days or so. You can save a client a lot of money, and maybe save a deal if you catch the moment when fed funds begin to trade in the 9.5% area. Two days in a row, not including Wednesdays, at the 9.5% level or above, and the Fed has tightened again.
Fed tightening is not inevitable. A big influence on Fed policy will be Congressional reaction to Bush's revised budget when presented on February 9. If it's favorable, the Fed may hold off, but if you hear a lot of "Šproposals are politically impossibleŠ." look out. The markets are expecting more good government from George Bush than he may be able to deliver.
The consensus forecast for lower interest rates later this year seems increasingly improbable to me. The Fed created inverted yield curves in 1965, 1968, 1973, and 1980; on average, rates did not peak for fourteen months after the onset of the negative curve. We've got most of a year to go.
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