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June 23, 1995
The drift in mortgage rates back down toward 7.50% was interrupted by some good news: durable goods orders showed surprise strength, up 2.5%.
Other news was bad news, which of course is good news for mortgages. Housing starts fell 1.3%; and 395,000 people filed for unemployment insurance last week, an eighteen-month high.
Mr. Greenspan obviously enjoyed himself this week in his role as The Great Obfuscator. Although the markets assume the Fed will ease, in talking for several hours over three days, the chairman gave no clue as to timing, magnitude, or frequency of easing.
The chairman did reveal a sense of humor. (Of sorts. If a knee-slapper from the chairman were marooned in the Sahara, it would still be the driest object in sight.)
During testimony on Tuesday morning, dead pan, Mr. Greenspan told a United States Senator that if the Senator understood what the chairman had just said, then the chairman had erred, and spoken too clearly. At a dinner that same evening, the chairman confessed fears that he might one day forget himself, and say what he was really thinking.
He moved on to zap his colleagues. Fed officials are supposed to make speeches, but never, ever appear to disagree in public with the Chairman. The current Fed governors are the chattiest bunch in memory, with easy-money Alan Blinder in the embarrassing lead. When asked about the Fed's meeting on July 5 and 6, Mr. Greenspan responded with an elegant put-down of his intemperate cohorts. With a big grin, he said he expected the meeting to be "most engaging." He must be looking forward to the meeting with all the pleasure a schoolmaster holds for an eraser fight.
The entertainment portion of Mr. Greenspan's week veiled a deadly serious policy announcement: "Failure to [maintain price stability] is apt to exact far greater consequences as a result of cross-border capital movements than those which might have prevailed a generation ago."
Translation: "If we don't control inflation, the dollar will look like the peso." No Fed chairman has ever said such a thing. In the past, Fed policy was confined to domestic concerns (jobs and growth versus inflation-fighting), and the American economy was considered to be so large and powerful that a run on the dollar was impossible. No longer.
In the last generation we have managed our affairs so poorly that we are now subject to the same market discipline which has governed all other economies.
When a central bank is forced to "defend" a currency, it must stay tight for longer than is good for its economy, which increases the chance of recession. The bond market reacted instantly, and positively, as it does whenever inflation-fighting is in ascendance over easy money.
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