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February 25, 1994
After some improvement early this week, mortgage rates rose again, and by this morning are the highest since last summer. However, it is hard to describe 7.75% as some great disaster: only a dozen years ago, there was a one in front of that rate, and a 'teen at the end of it.
In a thin week for data, January Consumer Confidence retreated a bit, Durable Goods Orders surged 3.7%, their sixth straight gain, and Initial Jobless Claims held high.
The bond market has a case of the screaming midnight bejabbers. Chairman Greenspan is not under the bed, he's up, wandering around the room, talking about what he's going to do next, and it's no nightmare; we are very much awake.
Mr. Greenspan told Congress, "Short term rates are more likely to have to rise than come down." Nothing really new, here, but hearing it out loud is scary.
His word choice is interesting. Nothing passive, as in "short term rates are more likely to riseŠ." Nope: to have to rise. He is the guy who will have to have them rise. No accident, no "the market did it." Have to.
The astounding thing is that nobody objects (except some thoroughly demoralized masters of the bond market universe). During his Congressional testimony, there weren't even any complaints from the usual populist dingbats who think money should be free all the time.
And from the White House comes Š encouragement?
The President, a little nervous, expressed hope that the Fed knew what it was doing, and wouldn't overdo it. Laura Tyson, Chair of the Council of Economic Advisors, about whom financial types were suspicious, made clear her understanding (and tacit agreement) that the Fed had made only the first of several tightening moves to come.
Leon Panetta's budget assumes at least three more hikes from the Fed this year. Lloyd Bentsen, Treasury Secretary, indicated that Fed tightening had been expected, and was to be expected. Retiring Fed Governor Mullins said that contrary to suggestions in the press, the Fed felt no pressure from the White House to keep rates too low.
What is going on here? This is an election year, and the shape of Mr. Clinton's next Congress depends on the health of the economy, which the Fed is trying to slow down. It's an awful thing to have to admit, but it looks as though Mr. Clinton is trying to do the right thing.
If it's the right thing, will limit inflation, and help bonds, what's wrong with the bond market? One problem is the Federal Reserve Water Torture. From 1989 to 1992, the Greenspan Fed eased money 24 separate, little times (real count, no joke). Presumably the Fed will tighten one, little bit at a time. Drip, drip, drip, dripŠ.
Nobody knows when the Fed will be finished, or at what rate level, or (horrors) if they are too late.
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