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February 9, 1996
Mortgage rates improved after last week's scare, and finished near 7.25% at "zero and zero".
There were no economic data of note, and we won't get a good reading on the economy until Friday, March 1 with the next set of job statistics.
By then the data vacuum will have lasted for three months: December lost to shutdown, January to weather distortion, and February waiting for news. In the same months, bonds have traded in a very narrow range, and mortgages even narrower: 7.125%-7.375%. No news and a long, tight range are perfect conditions for a large surprise.
Several peculiar events in the markets have added to the uncertainty, and may lead to a predicament for the Fed. -- Having held politely and reassuringly in the $300s, Gold blew to a five year high, touching $420/oz. -- The main index of commodity prices (the "CRB") also hit a long term high. -- January payrolls were weak, possibly because of weather distortion, but wages showed solid gains. -- The stock market. Oh, Lordy: the stock market. In only 39 trading days, the Dow has rocketed from 5200 to a new record close at 5539, and this morning is threatening to take out 5600.
These are signs of economic strength, or speculation, and not at all the conditions under which the Fed should ease. Yet, the Fed has to help the economy.
When the Fed eases to help a weak economy, it cannot allocate the easing to any particular sector. When the Rust Belt was in trouble in the early '80's, there wasn't a thing in the world the Fed could do to help. The housing market is one traditional beneficiary of an easy Fed; but this time, nothing: no spike in sales or prices.
When the Fed eases, investors have their own ideas about how to deploy the Fed's largess.
Money is chasing financial products, and financial product inflation is as disturbing as any other. The Fed doesn't like a hyperbolic Dow chart any better than a steepening CPI.
The Fed is not the only nervous party. The Fed cut its overnight rate to 5.25% last week, and Treasury yields clear out to five years are the same or lower, indicating unanimous expectation of more easing to come. However, the yield on thirty year Treasury bonds rose to 6.17%, almost a quarter point above its January low.
Everybody in the money business wishes the stock market would cool it for a while. Putting a needle to speculative bubbles is part of the Fed's job, and the Fed can't allocate needling any better than easing.
Stab one, stab all.
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