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February 24, 1995
On Thursday morning, 30-year mortgage rates fell to a six-month low: 8.75% at "zero and zero". Rates rebounded later the same day, but today remain under 9.00%.
There has been no similar improvement in ARMs because short term rates are holding high. ARMs can't improve until the Fed reverses course entirely and begins to ease.
The fall in long term rates this week can be directly traced to Alan Greenspan's testimony before Congress. The Chairman's performance was in the great, oracular tradition of the weigh-yourself machine: drop in a penny, and get your weight and fortune told.
Example: "There may come a time when we hold our policy stance unchanged, or even ease, despite adverse price data, should we see signs that underlying forces are acting ultimately to reduce inflation pressures."
Translation: "We won't worry about inflation if the economy collapses."
Secret thought: "These guys have no idea from listening to me, but 'the time' to stop worrying about inflation may not arrive until late in the next century."
The markets have overreacted on the positive side. They are justified in some relief, since the last time the Chairman testified, he gave a bayonet-the-wounded oration. However, some neutral wait-and-see from Mr. Greenspan does not mean that peace is at hand, or even a truce.
From the sublime to the ridiculousŠ.
Alan Blinder, Fed Vice Chairman, seized this week as a chance to continue his campaign to replace Mr. Greenspan when his term is up next year. Mr. Blinder's public efforts muddied the Fed's water, the markets, and himself.
In early remarks, Mr. Blinder offered that the Fed should be prepared to make a pre-emptive strike against recession, just as it had against inflation. Translation: the Fed should ease quickly at the slightest sign of recession. Fact: recession signs always appear before the Fed can know for sure that inflation has been whipped. That's why we have recessions.
On Thursday, the bond market was happily cruising along when again appeared the thoughtful Mr. Blinder. In early afternoon, he said his earlier comments were merely "abstractions," and that pre-emptive easing was a remote possibility. In seconds, bye-bye bonds, adios 8.75%.
Markets assume that this sort of reversal follows a chat with the Chairman, who may have pointed out that the Fed's next move will be to tighten again. Of course, the Chairman might only have said: "Please don't speak while I'm trying to testify. It's impolite, and makes people nervous."
The object of Mr. Blinder's campaign is his potential nominator, the President, who has a soft spot for unguided blather, longs for an easy election-year Fed, and has no gift for picking nominees. Beware schmoozer and schmoozee.
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