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May 6, 1994
News of a 267,000-job addition to payrolls in April has taken mortgage rates above the highs recorded after a similar surge in March. Thirty-year bond yields crested at 7.43% a month ago; at this writing the market has hit 7.51%.
Here's the best indication that wages and hiring are about to accelerate: last month, the average work week was the longest in fifty years. ("That's enough overtime; let's hire some more people.")
Only a significant slowdown in the economy can prevent mortgage rates from stair-stepping well up into the nines.
The markets, politicians, and ordinary bystanders are in an unusual state of anticipation.
Consider Michael Fay. Which was worse: the fact of the caning, or months of waiting, imagining, and hoping to be spared?
A growing number of Democratic politicians are trying to sell the idea that economic growth can continue at a high rate for a long time and not trigger inflation. And, besides, if inflation does appear, we'll deal with it then.
This approach is a classic, "what me worry?" way of dealing with future pain: ignore it. Sustained high growth always has resulted in inflation, and inflation is easier to prevent than to stop. A little like vandalism, there.
The markets, on the other hand, have long memories, vivid imaginations, and more to lose than the pols.
The markets know that at this very moment Alan Greenspan is soaking his rattan cane. The markets do not know when the sentence will be carried out, and they have not been told how many strokes they are going to get.
Young Mr. Fay was getting prepared for a half dozen lashes when his sentence was reduced to four. Four may be just as bad as six; but at the two mark, at least he knew he was half way done.
The Fed has its next formal meeting on May 17. The next tightening move has been expected as an immediate consequence of that meeting. However, as the economy is out-performing all forecasts, the Fed may move sooner (Thwack!).
For the markets, this two-week wait is nowhere near as bad as the worry about how many lashes this next time, and when it will all be over. Sixty days ago, the most pessimistic forecast had the Fed raising the Fed funds rate from 3.00% to 4.50% by the end of 1994. Now, mid-range forecasters think the Fed is going to go all the way to 4.50% in one whack (Thwack!).
Will that be the end of it? Sure doesn't look like it. Every finance type wishes the Fed would just get it over with, all at once, if necessary. Fed funds to 8.00%? Fine: just finish!
Of course, the Fed can't do that: the economy might pass out. Then they would have to revive us, and repeat the process.
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