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June 28, 1996
Mortgage rates have fallen to their lowest levels since early June, down under 8.50% at "zero and zero."
There was nothing in another batch of strong economic data to justify the drop in rates. Orders for durable goods surged 3.3% in May, inflated by big purchases of aircraft, but still a remarkable performance. Existing home sales, supposedly weakened by high interest rates, set a new record for a single month in May: 4,260,000 sales, up 1.4% from April, and up 17.7% from May, 1995.
All through June the bond market had assumed a 50-50 chance for tightening at the Fed's meeting next week, and if not at that meeting, a near certainty at the one in August.
Suddenly, it's clear that the Fed will hold steady next week, and has no plans to tighten at all -- hence the bond rally this week despite strong news from the economy.
If the economy is strong, perhaps dangerously so, why would the Fed back off? Are all the conspiracy theorists right after all? Did the White House lean on Mr. Greenspan in the course of his re-appointment?
Fed-watchers keep a sharp eye on recently departed Fed governors. These people would never betray a secret, but their thinking reflects the most recent attitudes at the Fed, and occasionally the recently departed are authorized to spring a leak.
Some of the departed are reliable, and some not. Wayne Angell turns out to be an inflation superhawk and gold nut, but a more judicious departee is Manuel Johnson, past vice chairman of the Fed, and now with his own consulting firm.
The bond rally broke out on Thursday minutes after the quiet Mr. Johnson released his estimate that the Fed would not move until after the election.
Why? Keep it simple, and drop the conspiracy theory: because the Fed believes the economy will slow down all by itself in the second half of the year.
While an immediate help to bonds, delay by the Fed is not necessarily good news for bonds in the long run. It would certainly be convenient for the economy to cooperate, and the Fed would prefer to stay bunkered up while Mr. Dole offers his ritual sacrifice.
However, all year long, ever since the Great Blizzard, every forecast has called for an economic slowdown. Every forecast has been wrong. The Fed wishes it had not eased last December and January, but wishes even more to avoid the appearance of disorder made by a quick reversal.
I'd rather see the Fed tighten a notch. One unambiguous dose of inflation, say in next Friday's payroll data, and the Fed will have the fact of disorder on its hands.
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