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June 4, 1999
This week's economic data supported the likelihood of a Fed tightening move at its June 29-30 meeting... and another one after that, rather sooner than later. Two such moves, a quarter-point apiece, taking Fed funds from 4.75% to 5.25% by summer's end, are just about built in to today's rate structure. Two such moves would be only a two-thirds unraveling of last fall's three-move emergency easing, and not the beginning of a pre-emptive demolition derby. That's the good news. Unless and until the economy slows -- substantially, from 4+% growth to 2% or less -- there is no reason for borrowers to expect mortgage rates to return to wintertime lows around 7.00%. The lowest-fee packages have been near 7.625% for several days, and may enjoy some minor, transient improvement, but that'll be it. The good news case works like this. Long rates, mortgages and bonds, have executed a two-year U-turn, right back to levels prevailing before Asia began to fall apart in the summer of 1997. Tuesday's Purchasing Managers' index showed a manufacturing rebound to pre-Asia conditions, now a pink-of-health 55.2%. The price component of that index frayed more neurons at trading desks, rising to 52.2%; but once again is only another post-crisis U-turn from all-time fire-sale lows last fall and winter. There is no sign of widespread inflation beginning to percolate through the economy. Commodities are under control, oil is back down to $16.50/bbl, the Great West Coast Gasoline Shakedown is unwinding, and extraordinary growth in productivity is offsetting wage gains.
Still, the Old-Time Inflators are grumbling.... "Productivity? Hah! There's nobody to hire. A screaming economy added only 11,000 jobs in May and overtime rose by 10%. You measure productivity by dividing the value of production by the hours worked to produce it; these rises in productivity are just businesses adapting to scarce labor, and their next adaptation will be wage competition. "And another thing. There's no law that says commodity prices are the only source of inflation. The old wage-price spiral is the worst of all, and the Fed is already behind. Four-point-TWO unemployment?! Stocks... new home sales up NINE percent... bubbles... those infernal New Age Tinkerbells all over the place...."
Grumbling or not, the chance for big-time pre-emption by the Fed -- sustained tightening, quarter-pointers turning to halves -- isn't any more likely now than a return to wintertime interest rates. Just the mention, the mere thought of pre-empting has raised anxiety, and rates.
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