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August 12, 1994
Mortgage rates are holding in the eights despite the imminent threat of Fed tightening.
Though the Treasury borrowed $40 billion this week with no particular strain, concerns about inflation are deepening. The July Producer Price Index jumped a half percent, and the Consumer Price Index rose .3%, while the "core" rates gained .1% and .2%, respectively.
The last weeks in August are usually a sleepy, too-hot to argue, no-news, vacation time, and a pause before the world wakes up and goes back to work. Not this year.
The Fed has inflation worries, and is going to act on them soon. The Fed's action will transfer its worries to another party, for whom a rapidly growing economy may be the last, fading hope.
The Fed is not pleased by this week's higher inflation numbers, though it's possible to quibble on grounds that the "core" figures are okay. Sometimes it's reasonable to throw out food and energy prices because they are prone to random bouncing. However, since early this year, energy prices have bounced in only one direction: up. A sustained, worldwide increase in oil prices is one of the Fed's nightmares.
Mr. Greenspan announced his intentions in brief, unnoticed testimony on Wednesday to a Congress totally preoccupied by other matters. In relatively direct language, he said that the economy had hit its capacity constraints, and price pressures were here, not "at some point in the future." Further, the Chairman testified that last year's 2.5% inflation rate "must be reduced." Inflation now is higher than last year, and the Chairman is past his limits.
Take cover. The only questions remaining are on which day the Fed will tighten, and by how much.
Among those not in a bunker, but who ought to be, is Mr. Clinton. His crime legislation has died an embarrassing death in the House, losing votes from 58 Democrats, and the last Clinton-style health plan is in desperate trouble in the Senate.
In two weeks, a healthy economy may be Mr. Clinton's only selling point in the Fall elections.
Mr. Clinton has gotten and taken good advice about not picking a fight with the Fed. It's been relatively easy to avoid a fight so far, as the Fed this year has done only what the Chairman has said: "removed excessive stimulus."
The Fed's next moves will be for real: it must now actively seek to slow the recovery. And, contrary to popular belief (ask Jimmy Carter and George Bush) the Fed does not protect Presidents in election years.
Along about Labor Day, the fireworks between the Fed and a short-tempered President should be something to behold. Take Clinton for color, smoke, and noise, but bet on the Fed for effect.
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