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March 24, 2000
The Fed has tightened five times in nine months, taking the Fed funds rate from 4.75% to 6.00%.
Ho-hum.
Mortgages are unchanged near 8.375%, and all three stock market indexes have rebounded: the Dow above 11,000, the Nasdaq above 5,000, and the S&P 500 up 5% year-to-date.
The Fed's announcement of its latest move on Tuesday included a model for descriptive accuracy: "Economic conditions and considerations addressed by the Committee are essentially the same...." Five quarter-point hikes, and...
Ho-hum. Yawn.
How long, how high, how tight will Mr. Greenspan's campaign have to be in order to get a slowdown response?
During his thirteen years in office he has executed two complete tightening-easing cycles; the current one will be his third. If it ever ends.
A look back at the Chairman's prior two adventures will shed some light.
When he first took office in the spring of 1987, his first moves were to tighten. (If you drop a mole down onto a lawn, it's first instinct is to dig; if you drop a central banker into an economy, his first instinct is to raise interest rates.)
Interrupted briefly by the Crash of '87, Mr. Greenspan's first cycle resumed in earnest in March, 1988. In fifteen sequential hikes Mr. Greenspan drove the Fed funds rate from 6.50% to 9.75% by June 1989. The housing market fainted when mortgage rates reached 11.50%, and took the rest of the economy down with it.
From mid-1989 until September, 1992 the Fed cut rates in twenty-three consecutive moves, from 9.75% to 3.00%.
Mr. Greenspan's second up-cycle began in February 1994, and was a short, sharp punch in the nose. In only eleven months, with individual hikes as large as .75%, Mr. Greenspan doubled the Fed funds rate to 6.00%.
Once again, when 9.75% mortgage rates strangled the housing market, the overall economy cooled -- so fast that the Fed had to ease three times in the next year.
This time, Mr. Greenspan has raised the Fed funds rate 1.25% and mortgage rates have risen only half that much. Since January, the Fed has tightened twice, and mortgage rates have fallen almost a quarter percent.
If the Treasury buy-back is distorting the market for long-term money, and protecting mortgage rates from the Fed, what new mechanism will slow the economy?
I don't know, but we are all going to find out: Mr. Greenspan is a very persistent man.
It is fashionable in some circles to ridicule his current effort as irrelevant, like the Smokestack economy, and that is not at all a wise thing to do.
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