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June 9, 1995
Mortgage rates have rebounded from last Friday's 7.50% low, rising gradually to around 8.00% at zero and zero.
When there is an extreme move in interest rates, in this case down from 8.375% to 7.50% in one week, there is always a bounce-back. "Extreme" is the case here. The overall improvement in rates since January is the largest straight line move since 1982, and the rally in the bond market last Friday, June 2 may have been the best single dayŠ ever.
The second law of extreme change goes like this: whenever volatility appears in a market, it takes time for things to calm down. A violent bounce back begs a re-bounce, and so on, until the market settles into a comfortable range. "Volatility" in the market sense means up and down: one of Wall Street's great euphemisms is to refer to any mass loss of client shirt as a "volatile" market.
Expect some genuine volatility for a while.
In an unusual performance, Alan Greenspan added to this week's rate rise.
The chairman of the Fed is supposed to be invisible when his tightening is doing damage to the economy. His objective is to stay as tight as possible as long as possible in order to do maximum harm to inflation. Public debate does him no good at all. He is, after all, trying to throw people out of work.
This week, Mr. Greenspan did something unprecedented. He appeared, spoke for the record, spoke without obfuscation, and even used the "R" word. (Fed chairmen never use the "R" word except when saving us. Mr. Greenspan is still in the creation phase.)
"The probability of a significant recession in the last part of this year and into next year has decreased very significantly." Bad recessions follow bad overheating. The chairman believes the Fed has pre-empted overheating, and hence the following crash. The bond market reacted badly, which the media attributed to an absence of easing by the Fed.
Not quite right. Bond ghouls don't want the Fed to ease. They want a recession. The chairman just told them that he doesn't see one coming. If there is no recession coming, why are we buying 30-year Treasury bonds at 6.50%?
As of today, we're not. Rebound.
The long run still looks fine. Since inflation is somewhere between low and too low to measure, rates are likely to resume their decline, recession or not.
One other Fed note. The media have discovered that the Fed meets periodically, and clients are following the pre-meeting hype (next: July 5-6). The real world is not so tidy. The members of the Open market Committee not only meet; they also have telephones. They talk whenever they want, act as necessary, and hope for surprise.
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