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August 14, 1992
After setting new 1992 lows, interest rates had another painful Thursday. As there was no surprise event driving rates up, we expect yesterday's rise to be as temporary as the one last week.
The Treasury auctions went well, and economic data describe negligible growth and 50's style inflation.
Both the Consumer and Producer Price Indexes rose a mere one tenth percent in July, while gold prices plunged to a sixyear low at $334. Modest July gains in Industrial Production (up .4%), and Retail Sales (up .5%) were offset by samesize downward revisions for June. A surge in Business Inventories suggests a coming slowdown in demand for new production.
Every borrower we talk with these days has the same thing to say: interest rates are low because of a preelection conspiracy, and will rocket up after the election. They tell us they are in a hurry to lock in, refinance, or get the house built/bought before November.
Clients are unsure about excatly who the conspirators are, but George Bush gets mentioned a lot.
Now, it is refreshing to change the subject from the normal borrower topic ("I thought rates were lower than that"), and it is strange to be trying to cool off borrower urgency, but election day itself won't change rates.
Presidents don't have the power to manipulate interest rates for short term political advantage. When presidents try to stampede the Fed, the markets raise rates.
There is a conspiracy in the White House, but it's an antiplan.
Here is a president nearly ruined by a lousy economy. George Bush is so out of touch that he doesn't even know to take credit for the major accomplishment of his presidency: thirty year lows in interest rates and inflation.
Why not claim victory? Instead of blaming somebody else for the recession, say it is the inevitable consequence of too much debt, a requirement to reduce inflation, and an absolutely necessary foundation for new growth.
Nah. The Great Communicator rode off in the sunset.
A year or two after the election, Bill Clinton is likely to get credit for a lot of growth with low inflation, and maybe an easy opportunity to deal with the deficit all because the Bush administration inflicted the pain.
The financial markets figure either guy could as easily take advantage of the opportunity or screw it up, and it will be a year before we'll know which way it's headed.
Meantime, the normal flow of surprises will determine rates this fall, not the election.
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