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April 5, 2002
The combination of Palestine, slow-growth economic data, and a shaky stock market have driven down long-term interest rates a quarter of a percent in four days. Ten-year T-notes crested at 5.44% and have fallen to 5.21% today; low-fee mortgages are down to 7.00% from 7.25%, and can crack the sixes any minute, now.
Only two weeks ago, the Fed was expected to tighten .25% per meeting, starting in May. Forget that: the Fed will pass in May, and probably June as well; maybe doing nothing until fall. The causes of change: today's weak employment data, a flattening supply management index, poor business profitability, and even the Fed has an eye on Palestine.
Palestine. The Bush administration's dramatic policy shift yesterday is an extraordinary act of flexibility, speed, and courage in the face of changed circumstances.
Only three weeks ago, Veep Cheney on tour learned that the Arab states would not support further American action in the Middle East until an acceptable settlement has been reached in Palestine. The next week Crown Prince Abdullah brokered a separate Arab peace with Iraq. In the last ten days, Israel's methods of self-defense have proven so counter-productive that they had no supporter in the world save America; worse, Israel's actions have gradually become regarded as an American assault on Palestinians.
The administration's new policy, rejecting Israel's tactics, is a big step forward, but there is a lot ahead in the next few weeks. We're going to have to get past the obsession with the untrustworthy and peripheral Mr. Arafat, who is powerless except in preserving his life and title.
We're going to have to accept that no one in or outside Palestine has the power to stop the suicide bombings until a settlement is reached, and negotiations will have to proceed in the face of them.
There is a difference between random attacks on civilians by isolated bands of fanatics, and suicide bombings used as a weapon of war by a people without any other means of resistance. The former is a lethal annoyance which can be contained; if peace is not made with the latter, it can destabilize a region and destroy Israel. The need to make this distinction will rise again and again during our mis-named "War on Terrorism." We really mean a "War for Civilization," but if we said so we would get in awkward arguments about whose civilization.
Of course the bombings must stop, but it may prove necessary for a couple of generations of American troops to separate two peoples who cannot abide each other.
Until then, or peace by some other means, each threat of war in the Middle East will drive money to safety, helping bonds and mortgages.
Contrary to leftist theory, the fact of war hurts all markets: it's expensive, destructive, and inflationary.
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