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September 4, 1998
Mortgage rates reached new lows on Monday in the worst of the Dow fright. 30-year low-fee packages briefly touched 6.75% before rebounding toward 6.875% on news of a remarkably resilient American economy.
Today's payroll figures for August showed a 365,000-job surge (a solid 250,000 in excess of returning GMers'), unemployment remained at 4.5%, and year-over-year growth in wages rose to 4.2% -- triple the inflation rate. The August report from the National Association of Purchasing Management showed a rebound in Asia-damaged manufacturing, up to 49.4% from 49.1%.
Your clients are having a tough time dealing with the deafening "FED'S GOING TO EASE" blare, so recently amplified by the injured soprano chorus of stock brokers. Borrower calls no longer ask if rates will come down. Instead: "How far did rates fall today?... Is that all?... Doesn't matter, everybody says they're going way down...."
They may. If the American economy cracks -- consumer spending in particular -- the Fed will indeed ease, and there will be no bottom to rates.
However, stick with the present: the American economy shows no cracks at all. The people demanding action from the Fed are saying today that strong August reports on the economy do not reflect damage done by the stock market correction-in-progress, nor by Russia's bankruptcy.
Maybe... maybe. But, any serious Fed-watcher must reply in some heat: there is not one single solitary thing that a Fed ease would do for Russia, or for Japan, or any other wrecked foreign economy. America is already pulling as hard as it can, and creating inflation here won't improve the miserable worldwide stew. Further, the Fed has no responsibility whatsoever to restore this year's 18% stock market gain, or to protect last years'.
The Fed's job is to react quickly and forcefully if the world's financial crisis begins to slow our economy. With any luck, the Fed will see such an effect before the rest of us, and the first sign of growing weakness may be a surprise ease by the Fed, but not yet... not yet.
To understand the level of panic in the markets, you can't miss the tidbits.
One: North Korea, whose new nuclear facility was discovered three weeks ago, shot a missile over Japan this week. Two: In Hong Kong, that great free market hope, the central bank spent $15 billion last week in a fruitless effort to support its stock market. Three: Treasury Secretary Rubin and Alan Greenspan meet Finance Minister Miyazawa in San Francisco tonight.
One observer noted this week: "At these yields, Treasurys are not an investment, they are a safe deposit box."
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