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April 28, 2000
The financial markets traded nervously going into yesterday's double threat: inflation numbers in the first quarter GDP report, and a new speech by Alan Greenspan.
The results justified the fearful anticipation. Mortgage rates rose almost a quarter percent this week, as the low-fee deals reached 8.375% territory.
The GDP grew "only" 5.4% in the first ninety days of 2000, roughly double the Fed's speed limit, but less than the 7%+ feared in the markets.
However, the inflation numbers were hideous: the personal consumption price index rose 3.2%, the most in six years, up from 2.5% at the end of 1999, and the GDP deflator jumped at a 2.7% pace, a four-year high, up from 1.9%.
While a portion of those index values could be dismissed as transient effects of the oil-price spike, nothing could offset the worst-possible development: the long-feared percolation of tight-labor-market pressure into the fact of rising wages. 1st quarter labor costs increased 1.4%, the biggest quarterly rise in ten years.
The inflation news did the damage, and for once we needn't have worried about the Chairman. His speech to the Kansas City Fed was titled "Beyond Agriculture: New Policies for Rural America". I read the text, just to be sure Mr. Greenspan didn't slip in a shot at the stock market.
He stuck to the stock yards. Sort of: "Agricultural production will, of course, for the foreseeable future continue to be located in rural areas...."
Whazzat?
Agriculture... and beyond!
Richmond Fed president Alfred Broaddus this week stated the net result of the Fed's year-long rate-rising campaign better than anybody: "People are debating whether we're going to have a soft landing or a hard landing, and it doesn't look like we're having any kind of landing. It seems like we're accelerating to an even higher plane."
A "soft landing" is the holy grail of all Federal Reserve efforts to slow the economy, and especially the steady-as-she-goes, incremental, drip-drip-drip of quarter-point-at-a-time rate hikes. If the economy ignores this nice, polite incrementalism, the Fed can wake up one morning to discover it is chasing inflation, not pre-empting, and must hit the economy hard.
The situation is not that bad -- yet -- though the Fed could throw in a half-pointer any time, now.
Mortgage rates have been protected by the Treasury's buy-back program ($3 billion more this week), which has artificially pulled down T-bond yields. However, even if the Fed sticks to .25%'s, mortgages are headed above 8.50%.
Soon.
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