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September 10, 1999
The first quiet week in two months is ending nicely, T-bonds just above 6.00%, low-fee mortgages just under 8.00%. The producer price index arrived this morning, up .5% overall, but the "core" rate excluding food and energy prices fell point-one percent. Oil prices crested $23/bbl, but show no sign of infecting prices for other goods. If someone had told me last November that oil prices could rise from $10/bbl to $23/bbl in ten months and do no harm to inflation... well, that's a bet I would have lost.
The wide swings in bond yields and mortgage rates since July -- 5.83% to 6.30% and 7.75% to 8.375%, respectively -- have reflected the credit markets' extreme uncertainty about the Fed's intentions. Is the Fed fighting an authentic inflation problem? Merely removing last fall's now-unnecessary stimulus? Trying a modest pre-emption of a too hot economy? Attempting a teensy little poke at a stock market bubble? The hard-heads (who so densely populate the Wall Street Journal and Congress) want to force the Fed to lay out its thinking in plain sight. The knuckle-noggins never get it: the Fed is reacting, changing, shifting its intentions as it gets new economic data, just like the rest of us. This spring's strengthening economy made the Fed regret last fall's eases. More strong data in July reinforced the need for pre-emption. The early August data -- rising labor costs and falling productivity -- looked like real inflation trouble. The never-say-die stock market may or may not be a bubble, but is certainly supporting consumer spending. So, rates have swung hard, following Mr. Greenspan speech-to-speech. His remarks two weeks ago at a Jackson Hole convention of central bankers sounded very much like a man with a needle in his hand and a stock market mission. (The scene at Jackson is really something: three-piece suits in a cowboy capital... "Yippee-yi-o-ki-yay! Let's ride into town, raise some hell and shoot up an economy!") Markets were nervous going into a Greenspan speech on Wednesday. What did he give the nervous crowd? Jokes. Central banker jokes, but jokes, and not a word about monetary policy. "I have appeared on many platforms with President Ford... he never seems to change, but I keep losing my hair." Always laugh at the Chairman's jokes. The Fed meets on October 5, and I suspect the governors do not yet know what they will do at that meeting. A mountain of data arrives on October 1 which could cause another .25% hike, or relaxation for the rest of the year.
As we stagger from one report, one speech to the next, the probability remains high that the Fed intends to tighten only enough to slow the economy from 4% growth to something under 3%; and that such modest tightening as early as October 5 will do little harm to mortgage rates.
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