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April 21, 1995
In a race between the helpful impact of weak economic data and the harm done by a weak dollar, the shaky economy is staggering to a win. Mortgage rates are steady at 14-month lows.
Industrial capacity utilization rates over 85% have been a big inflation worry: in two straight monthly declines, capacity use has fallen from 85.6% back to 84.9%. The most powerful sign of slowdown is the sustained slide in the housing market: housing starts fell hard for the third month in a row, down 7.9% to a two-year low.
The International Monetary Fund has a standard prescription for a nation with a weak currency: raise your interest rates. This castor oil will cause a recession, and while your people are broke, they will have less appetite to buy fancy, imported goods (in our case, Lexus and Bimmer fleets, and the petroleum they run on). If you spend less, there is less of your money around, and it's worth more.
We don't yet know if the dollar is about to join the foolscap status of third world currencies, or merely the doghouse of misbehaving first world wallpaper (Sweden, Canada, Italy), or may be all right after all. But we do know that the Fed has no immediate plans to slip the IMF purgative to the economy.
The market for Treasury bills provides the best guess of the Fed's intentions, and in the last ninety days, bill traders have reversed their opinion. Now it looks as though the Fed's next move will be down.
January April
Fed funds 6.00 6.00
90-day bills 6.25 5.75
Six-month bills 6.55 5.94
One-year bills 7.35 6.15 The dollar may not be worrying the Fed, and carefree short rates are following, but long term rates have held steady since February. Long term investors are the ones who worry about the long term effects of a weak dollar: were it not for the dollar, the abrupt slowdown in the economy would have taken long rates, mortgages included, maybe a half percent lower than they are.
While the budget deficit and accumulated national debt are serious trouble for the dollar in the long run, the immediate problem with the yen still appears to be much more a yen problem than a dollar one. In turn, the absurd value of the yen is a bigger problem for Japan than for the US.
A yen at 79.5 to the dollar is not just a big problem for Japan, it's an unsustainable disaster in progress. Soon there will be a surprise of some kind, an accident, or unforeseen consequence which will restore dollar and yen to reasonable balance.
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