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July 22, 1994
Mortgage rates survived a brief bout of Greenspanitis to close almost quarter-percent better than a week ago.
A 9.8% drop in June Housing Starts reinforced market hopes that the economy is slowing slightly. New Building Permits also declined, and May Housing Starts were revised down to a negligible gain.
Interpreting the remarks of any Chairman of the Federal Reserve is a murky job, closer to reading the entrails of a sheep than calculating economic formulae.
The Chairman supplies the murk for good reason. A few times each year, the Chairman is variously invited to testify before Congress, or ordered to do so by law. He must then politely answer politically charged questions for a solid day or two without showing his true intentions to the markets. Since Congress can't be trusted with secrets, the Chairman must obfuscate.
Alan Greenspan may be the best obfuscator in a long line of able foggers.
His rhetorical approach to the need to be responsive without answering is to perform as an oracle. In the most elegant, scholarly, patient, and helpful way, he answers each question by articulating some principal of economics -- which may or may not have anything at all to do with the current situation. Also, since there is rarely a large constituency for higher interest rates, Chairman Greenspan never misses an opportunity to warn that higher rates may be coming -- again, no matter what the current condition.
On Wednesday, markets lurched when the Chairman said "It is an open question whether our actions to date have been sufficient to head off inflationary pressures, and thus maintain favorable trends in the economy." This is the sort of wisdom you get for a nickel in the weigh-yourself machine, or inside a fortune cookie, or from your horoscope, or from the I-Ching. Sufficiency of Fed action is always an open question.
Ditto timeliness. In a line a little more revealing of the way the Fed thinks, the Chairman said that it was far easier for the Fed to correct the mistake of raising interest rates too much than the mistake of "failing to recognize emerging inflation." Somebody has to prefer recession to inflation, and that's the Fed's job.
Despite a bad day for bonds while the Chairman testified, the Chairman said nothing definitive. In fact, in the last week, yields all across the maturity spectrum indicated less anticipation of a Fed tightening than at any time this month.
If you want something to worry about while the Fed waits for the economy to declare itself, worry about the next move by the world's largest credit junkie. On August 9, 10, and 11, the U.S. Treasury will borrow about $40 billion in new cash, and rates will tend to rise beforehand.
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