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March 28, 1997
Markets are closed today. Just as well: yesterday wore everybody out, as more strong economic data pushed an already nervous market into panic.
30-year T-bonds broke through 7.00% for the first time since last summer, closing at 7.08%; and mortgages just barely held on to 8.375% at "zero and zero."
The greatest damage was done by news of February home sales: up 9%, the largest rise in ten years. Some economists attempted a "yes, but" rescue: good weather inflated sales, and without the built-in seasonal adjustment, home sales rose only 1.2%.
Yes, butŠ sorry: Other data overwhelmed the apologists. Orders for durable goods were expected to fall a half percent in February after January's 4.0% surge. Instead, February rolled to a 1.5% gain. Production bottlenecks and price pressures are building: backlogs of unfilled orders rose 1.1% for the second month in a row.
One, little, lousy quarter-point rise from the Fed, and the markets flip out? Why? How bad is this going to get?
Worse, but most likely, not a lot. 9.00% mortgages later this year, maybe; only .25% worse than the '96 top.
Why panic? Keep it simple: think like the Fed.
At any given moment, the rate of economic growth can speed up, slow down, or stay about the same. Mr. Greenspan has made it clear that the current pace of economic growth is too fast. Therefore, we may safely assume that the Fed will continue to raise the Fed funds rate until the economy does slow down.
The Fed will act .25% at a time at 60 to 90 day intervals. It takes about six months for monetary policy to have an effect on the economy, and no single, .25% move will have any noticeable effect. By September, the Fed will likely have three moves in place at about the time the medicine begins to have its pre-emptive effect.
Unless.
Unless the economy either slows down or speeds up beforehand. If it slows down, Mr. Greenspan will deliver an elaborate, two-day "never mind" to Congress, and we can all get back to whatever we were doing.
If it speeds up, the Fed will push harder. In 1994, the economy accelerated after the Fed began to apply the brakes. The Fed's solution, as always? Stand on the brakes. In order, from February '94 through January '95, the Fed tightened .25, .25, .25, .50, .50, .75, .50. When the Fed wants you to slow down, don't argue: just slow down.
This, rough week was just the first market adjustment in anticipation of two more .25's by September. Next Friday's job data will give first indication of any needed revision in the Fed's plan, and further market "adjustment."
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