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July 5, 1996
One little bottle rocket from the Labor Department this morning has blasted Wall Street like the White House in "Independence Day," and left a soot-covered Mr. Greenspan pondering the stand-pat wisdom at Tuesday's Fed meeting.
Non-farm payrolls once again confounded prediction, not quite doubling forecasts in a 239,000-job surge. That was bad, but the details were worse. In June, average hourly wages gained nine cents, which may not seem like much, but was the largest single monthly gain in the 31 years the Labor Department has gathered the statistic, and a 10% annual growth rate.
On a poorly attended semi-holiday, you never know if a thin market has magnified bad news, or put a lid on it. As it is, mortgages and bonds are trading at their 1996 highs, 8.625% and 7.19% respectively. There is good reason to prepare clients for 9.00% -- quickly.
Most election years have little, if any impact on the Fed. It would not dream of window-dressing rates or the economy to benefit a candidate, or to protect itself from criticism. In two recent Presidential election years (1980 and 1988), the Fed tightened all the way through November.
However, this year the Fed has a special problem. Both candidates are giving top priority to wage growth ("We must end this stagnation!"), and the Fed is going to have a terrible time justifying the need to choke off the very success for which everyone has hoped.
Why must the Fed put on the brakes? Income-induced inflation is the worst possible kind. Commodity inflation can be stopped fairly quickly, mostly because our economy is no longer a big consumer of commodities. Inflation in the price of manufactured goods is equally easy to stop: slow demand a little, and manufacturers can't raise prices. Monetary inflation? Just stop the printing press.
Wages, on the other handŠ.
70% of American business costs are labor costs. Also,
the psychology of wages is tough to reverse: businesses have no sense of entitlement to higher prices, but workers will not accept any downward mobility in wages at all -- unless large numbers are thrown out of work.
Ignition in wages is a warning of the old, intractable 1970's enemy: the wage-price spiral. Pay me more, and I'll spend more; if I spend enough, prices go up, and I will expect to be paid even more. In the end game of the wage-price spiral, the Fed is forced to create a recession.
This year, Mr. Greenspan collects a good deal of grudging admiration, but a tight Fed has no friends. The national memory of inflation and the willingness to absorb tough medicine have all but disappeared.
The Fed must move hard and fast; if not, the bond market will take matters into its own hands.
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