Stocks Don't Get It
Daily Economic Commentary
US
Monday, June 21, 1999
The stock market seems to be acting as though it thinks that the FOMC is going to raise the fed funds rate by 25 b.p. on June 30, and that's it. Because more
than 25 b.p. had been priced into the stock market, equities can now rally. The stock market doesn't seem to get it. Until he changes his mind again, Chairman
Greenspan means to do harm to this economy. On June 17, Greenspan clearly drew a line in the sand at 3% growth for an economy that currently looks to be
growing in excess of 4%. And he went out of his way to hold capital gains - stock and housing - responsible for this excessive economic growth. At the very
least, Greenspan does not want the stock market to rally more. And if a stock market setback short of a crash would slow economic growth to 3%, all the
better. So, Greenspan's watching you, stock market (and CNN, too).
A lot of analysts are saying that a 25 b.p. hike in the fed funds rate won't slow the U.S economic growth to any significant extent. Perhaps they are correct.
But if Greenspan is serious about his 3% line in the sand, then he will raise the funds rate further and further until he feels reasonably sure that the economy is
slowing down to his target. A slowdown in U.S. economic growth from 4% to 3% would almost assuredly slow down corporate earnings growth. Even if
interest rates remained constant at their current levels, this would be a negative for the stock market. But if it is going to take an increase in the fed funds rate
of 50 to 75 b.p. to slow the economy to 3% growth, then stocks will be in for an even rougher time. The stock market seems to either be ignoring the Fed.
That's akin to fighting the Fed. And that's like playing tennis against a backboard. The backboard always wins and so does the Fed.
Paul Kasriel
Chief Domestic Economist
ntrs.com |
