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July 23, 1999
Mr. Greenspan's Thursday testimony resulted -- instantly -- in higher bond and mortgage yields, back to 6.00% and near 7.875% (low cost), respectively.
"Neutral monetary policy" now takes its place alongside "I didn't know it was loaded." Before the Fed tightened earlier this month, bond traders were unanimous in believing the Fed intended to reverse most if not all of last fall's three, .25% rate reductions. Then, simultaneous with the first reversal (Fed funds to 5.00% from 4.75%) the Fed announced resumed "neutrality", which confused everybody, including many traders lighter in the wallet, and raised hopes that one .25% pop would be it for the year. Mr. Greenspan on Thursday, referring to last fall's eases as "insurance": "The FOMC was of the view that the full extent of this insurance was no longer needed. It also did not believe that its recent modest tightening would put the risks of inflation going forward completely into balance." Italics mine. If the first modest tightening didn't restore balance to inflation risks, more is coming. If this is neutrality, I'd sure as hell hate to have Mr. Greenspan mad at me. The bond market is back to square one. Another .25% hike as soon as the Fed's August 24 meeting is built in -- again -- to current rates, including mortgages. Another hike after that is not built in (I know, I know... don't say EIGHT). Hopes for lower mortgage rates require a profound slowdown in the first-week-of August economic data.
Every time the chairman speaks, Fed-watchers try to glean the slightest hint about what the chairman is watching. People are forever worrying about stuff that the chairman isn't watching, which he often identifies by omission. For example, on Thursday the chairman did not mention the word "gold", nor "commodities" nor "money supply", nor "trade deficit". He indicated no serious concern about Y2K except to note that his banks are prepared for any irrational depositor panic to greenbacks. His stated concern was simple and direct, but damn hard to project into the future: "Should productivity fail to continue to accelerate and demand growth persist or strengthen, the economy could overheat." Ultimately, it's a lead pipe cinch that productivity will "fail to continue to accelerate". Maybe not soon, given the technology revolution; and the chairman certainly does not want to unnecessarily pre-empt a healthy economy. However, sooner or later, demand must slow, or... be slowed.
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