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September 12, 1997
Mortgages and bonds once again touched their five-week highs (high sevens and 6.68%, respectively), and for the half dozenth time began to slide back down. They won't slide far: the bottom of the five-week range is only an eighth of a percent under the top.
The UPS strike has garbled another economic report. The August retail sales report says sales rose only .4% after a red hot .9% gain in July. August demand may have been just as strong as July's; but if you don't have goods to ship, you can't bill your customers. No bill, no sale.
In a speech last Friday, Mr. Greenspan removed any doubt about the focus of his attention: "productivity" is his overriding concern.
Fed chairmen ordinarily avoid giving the markets any insight into their inflation-watching priorities. If the markets knew the chairman was watching wages especially closely, they would drop all other trading indicators in favor of wage-watching. The Fed never wants markets to abandon their normal concerns in favor of a narrow focus.
Once in a while, the Fed chairman has no choice. In the early '80's, Paul Volcker had to justify 20% interest rates to the public. He said excessive growth in the money supply was the inflationary enemy, and then had to act accordingly. For five years, the financial markets waited for the release of money supply data at 4:30EST every Friday -- perhaps the worst-ever Fed-caused distortion.
Friday, Mr. Greenspan went right at it; but this chairman is going to get away with his disclosure, distortion-free.
He opened with a recitation of abandoned guideposts: no, he doesn't pay much attention to the money supply anymore, nor to bank reserves; and, nope, the price of gold doesn't help much, either. Neither does the old bugaboo, the overall pace of economic growth.
Mr. Greenspan believes that gains in productivity are so strong that a hot economy won't produce inflation.
Why won't his statement distort the markets, turning us all into productivity freaks? Mr. Greenspan also said he doubted the accuracy of official statistics on productivity. If we don't have any weekly or monthly index of productivity to watch, we can't trade on Mr. Greenspan's bias.
If there is no reliable data, upon what does Mr. Greenspan base his opinion? The Fed has 500 economists who are eager to do the leg work for any index the chairman thinks he can use. These inside-Fed indexes are not released to the public if they would be of any use to trading desks.
Right, wrong, or indifferent, an optimistic chairman leads to relaxed markets.
Minor problem: if all the normal rules of inflation fear are suspended, we won't have any warning before the chairman's private indexes cause his optimism to fade.
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