|
May 1, 1998
Yea, though I walk through the valley of the shadow --and the shadows on Lower Manhattan Island are damn dark -- who should confront me at the next gloomy corner? Alan Greenspan, dressed as Grim Reaper?
Nah.
Goldilocks and Pollyanna, skipping along, hand in hand. The economy is not too hot, and not too cold; and will stay that way forever.
Over last weekend, the Fed leaked -- clearly, unmistakably -- that it had switched from a neutral stance to a bias towards tightening, and long term rates almost blew out their five-month ceiling.
The Fed leaked again on Monday night. Apparently believing the markets had overreacted on Monday, "somebody" at the Fed leaked word that yes, the bias was now toward tightening, but was not imminent.
Leak authentication works this way: the Wall Street Journal is the official mouthpiece, and official stories always appear on Mondays. Lesser leaks (amplifications, revisions like the monday-nighter) usually arrive in the Washington Post (as did the Monday-nighter), and occasionally in the New York Times -- never in "popular" publications.
Why doesn't Mr. Greenspan just call a press conference? It appears that he wanted a medium scare, not a 2,000-point Dow panic.
By week's end, some extremely unlikely data on the economy made the whole multi-leak episode look like a false faucet.
In the first 90 days of 1998, the economy grew at a 4.2% pace -- as an isolated datum, strongly reinforcing the Fed's hair trigger status. However.
Holy smokes, however: the employment cost index (ECI), an essential measure of wage-pulled inflation, slowed to a .7% gain in that same 1st quarter, way under the 1%+ forecast, and the lowest reading in a year.
Further, buried deeply in all GDP reports is the best single measure of inflation we have, a creature called the "implicit price deflator", which in the 1st quarter rose at a .9% annual pace -- the lowest since 1963.
To have inflation rise at the lowest pace since 1963 is very handy, as for bond and mortgage yields to go any lower, they would need to go to levels not seen since 1963.
The reassuring, late week data lightened the tension on the Fed's trigger finger, but the Fed isn't about to ease. Until the economy slows enough for the Fed to contemplate an easing move, mortgages will continue to rattle in the 7.125-7.375% range, more likely to go out the top than fall out the bottom.
|
