Nice guest appearance in Barron's by Randall Forsyth. It is tacked on to the end of Thomas Donlan's editorial column, and when I was reading it, I was wondering why Donlan suddenly sounded so smart. <g>
The Meaning of Neutral
More rate hikes are coming, as they should
"One needn't be a flim-flam man to be a central banker, but it helps." So
observed the late Robert M. Bleiberg on many occasions in his long tenure as
Barron's editor. And for all the huzzahs bestowed upon Alan Greenspan these
days, Bob's observation never seemed more apt.
America's central bank last fall engineered three one-quarter-point cuts in its
target for the federal funds rate. The global financial markets, in danger of a
"significant seizing-up," were lubricated by this liquidity, and asset prices
resumed their proper upward trajectory. Greenspan, along with the Treasury
Secretary and his assistant, were dubbed by Time magazine the Committee to
Save the World.
Last week the global markets cheered, at least for a few hours Wednesday
afternoon and Thursday morning, after the Federal Open Market Committee
reversed one of those quarter-point cuts, as expected, but were pleasantly
surprised when the panel declared it had "no predilection" about the near-term
course of monetary policy. From which it was universally inferred that no
further rate hikes would be necessary.
As we did last fall, when the drumbeat for Fed easing was at its loudest, we
must dissent from the mainstream. As we argued at the time-and the
performance of the U.S. economy has demonstrated since-no easing was
necessary then. Greenspan & Co. may well yet come to agree and reverse
the entire three-quarter-point reduction. To assume that the FOMC's shift to
a neutral policy bias assures there will be no further rate hikes is wishful
thinking. Since the Fed began in 1994 to announce policy changes when they
happened, each time it increased rates, the panel adopted a neutral bias. That
way the markets would not be bracing for the next dose of medicine; they
could hope (as they did last week) that it would be the last. Indeed, since
1994, the FOMC has adopted a tightening bias in word only when it wasn't
tightening in deed.
Meanwhile, the growth of money and credit, which paused in the first quarter
after last year's explosion, is now reaccelerating. Gold, to be sure, is
moribund, owing to central-bank selling, but industrial commodity prices have
rebounded, as evidenced by the Journal of Commerce index and last week's
purchasing managers' report.
Of course, the popular stock-market indexes hit new highs in the wake of last
week's FOMC meeting. But long-term interest rates now are higher than
before the Fed began easing last September. And the dollar buys fewer
Japanese yen. Flim-flam, indeed.
-Randall W. Forsyth |
