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September 28, 1995
Mortgage rates drifted slightly higher, near 8.125% at "zero and zero;" prices held up in the eights by better news for the economy.
Orders for durable goods turned in their best performance in a year, shooting up 4.9%. Also, initial claims for unemployment insurance fell by an unexpected 31,000 last week, which suggests that next Friday's employment report will be strong, and uncomfortable for bonds. As usual, the first-Friday report on jobs will set the interest rate tone for the whole month of October.
The credit markets are in a state of modest paralysis while waiting for Congress and Mr. Clinton to make a budget decision. Like curare, a small dose leaves you with your eyes open, thinking, and breathing, but unable to move; a little too much, and it's lights out.
There will be a budget decision before November 13, the absolute last run-out-of-money deadline. However, the markets are always concerned about the reality of any budget deal. Phony numbers? Stretch out the balancing act so far that nobody can tell if it's real?
Concern is well-placed: the Republican Medicare spending slowdown includes the phrase "look back sequester" to describe spending cuts it intends to make, but can't yet identify.
As the anesthetized audience waits quietly, somebody had a good idea. Daniel Patrick Moynihan (D, NY) formally proposed to reduce by 1% the cost of living (COLA) adjustments to Social Security and income tax indexing. This one little change would save $281 billion over the seven year life of the budget, and take the heat off Medicare.
Would it be fair? You bet. Economists, notably Alan Greenspan, have said for years that the CPI overstates real inflation by about one percent. 43 million recipients of benefits would pay a small price, and so would a hundred million taxpayers, who would lose a minor part of their "bracket creep" protection. That's good, broad-based sacrifice.
So there's a deal on the way?
No. Deals need leadership.
Instead, Bob Dole, running for the job of leader, ran for cover: "If this is going to work, we've got to be in it together. It will happen only if everybody sort of joins hands."
The White House: "There is significant disagreement as to the degree of the [CPI] overestimation." And, Mr. Moynihan's revision "is too large."
Hopes for an honest, quick settlement appear to be sort of too large. Pass the anesthetic, please; I'm beginning to feel pain in my wallet area again.
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