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March 14, 1997
Don't make loud noises behind nervous people. If they are really wound up, the reaction can be painful for everybody.
For two weeks, ever since Mr. Greenspan's warnings, the financial markets have been sitting -- twitching -- in anticipation of the Fed's meeting next Tuesday, March 25. Yesterday, tension building, one day closer, a loud noise, silently scrolling across the bottom of CRTs: FEBRUARY RETAIL SALES UP .8% VERSUS EXPECTED .6%Š MOREŠ
JANUARY .6% REVISED TO 1.6% GAIN.
February was bad news; JanuaryŠ tripled? The Dow sinks 160, and T-bonds soar to 6.97%, just barely holding a six-month high. This morning's reassuring wholesale price report, (down .4% overall and down .1% "core") recouped only a third of the losses, and "zero and zero" mortgages are hanging on at 8.25%.
At this point, whether the Fed finally does or does not raise the Fed funds rate by .25% next Tuesday has ceased to matter. The prisoner expired while awaiting sentence.
The ultimate outcome seems inevitable: if not in March, then April, or May. The economy is not surging to a higher growth plane, but consistently, gradually accelerating toward its inflation limits.
The trend in claims for unemployment insurance fell again, to an eight-year low set just before the last recession. Sooner or later, the last person wanting a job will get one, and the next business needing to hire somebody will have to offer a substantial raise to hire an employee away from somebody else. That's how the trouble starts.
Most often in the last 20 years, the trigger for inflation has been commodity prices. Here, oil is back to $20/bbl, gold still around $350/oz -- no commodity inflation at all. This time, the risk is the "wage-price spiral," which you haven't heard mentioned since the '70's.
The sense of inevitable Fed intervention seems well-placed, but there is still one escape available: by some miracle, the economy slows down. The old excuses just won't wash in an economy this strong: productivity gains will prevent inflation, foreign competition will keep a lid on, technology, and so on.
How might the economy slow down? The strong dollar might do it, by pricing our good out of the export markets. Maybe. A better hope is a self-inflicted cure: the markets act on their nervousness, and higher market rates slow the economy down for the Fed. Another few weeks like this one would do that trick.
Nothing would please the Fed more than to have the market do the tightening by itself. An old, grim rule of politics and central banking: never murder a man who is in the process of suicide.
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