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June 18, 1999
Mr. Greenspan's testimony and a favorable CPI report have knocked long rates down a quarter percent. However, the bond rally is over this morning, and low-fee mortgage rates are not likely to fall soon below today's 7.625%. Before Mr. Greenspan's testimony the bond market had feared an all-out assault from the Fed, maybe six or seven rate rises; instead, the chairman's speech suggested a more modest approach, one or two tightenings before fall. Better wounded than wiped out altogether.
The CPI report was as helpful as it could have been: the overall index was unchanged, which calmed the market panic following April's .7%, nine-year-record surge. The CPI report lead directly to the Chairman's comments: price increases are not an immediate problem, but the overheating job market must be intercepted. Bonds rocketed to a nice rally as soon as his prepared remarks were released: "...large productivity gains have held unit cost increases to negligible levels. Pricing power is... virtually nonexistent." Competition worldwide is so tough that businesses cannot raise prices ("pricing power"), and so the Fed is still ahead of the inflation curve. "Nonetheless,...(traders clutch at chests) certain imbalances pose a risk to the longer-run outlook." Which imbalances? How bad? "...Labor productivity has not grown fast enough to accommodate the increased demand for labor...." He then put a specific number on the imbalance: one percent of economic growth -- one-fourth of the current total -- is due to labor market overheating. There's a clue for figuring out what the Fed will do next: 4% GDP growth is too fast. In the last three years the Fed has tolerated growth as high as 6%, but any numbers above 3% now will attract more whacks from the chairman. Again, reassurance that the Fed is ahead of an actual inflation problem: "To be sure, labor market tightness has not, as yet, put the current expansion at risk." Next paragraph, the need to stay ahead of the curve: "Because monetary policy operates with a significant lag, we have to make judgments about how the economy is likely to fare a year or more in the future...." Resigned traders knew what was coming: the "P" word. "To foster maximum sustainable economic growth, it is useful to preempt forces of imbalance...." Preempt. And so he will, June 30th. Two moves are built in to today's rates, but not three.
In his short, four page testimony Mr. Greenspan used the word "bubble" in reference to the stock market... five separate times.
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