"GREENSPAN IN A PANDORA'S BOX"
Easy Al in a Pandora's Box: Al has only himself to blame for trying to engineer his way out of this mania bubble. How could he go from jawboning tough rhetoric in May and grease the skids for everyone for the 1/4 point rate hike June 30 to immediately go to neutral bias on the same day? Let's look at Al's words:
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"Owing to the uncertain resolution of the balance of conflicting forces in the economy going forward, the FOMC has chosen to adopt a directive that includes no predilection about near-term policy action. The Committee, nonetheless, recognizes that in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth."
-FOMC announcement, June 30
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The reality of this statement is even though we have moved to neutral bias so Lawrence Summers can get cozy in his new chair after his honeymoon ended, policymakers are nonetheless poised to raise rates another notch on any whiff inflationary pressures as demand continues to outstrip supply. Easy Al has to look at the devil in the details in the all too important productivity figures tomorrow and Friday's Employment Report.
This is simply a fight between the hawks and doves with the hawks looking at the low unemployment rate and wage pressures and to take back one more of the rate cuts from last fall before the meltdown last Sept/Oct. The doves led by Easy Al turn into a metamorphis and give New Paradigm argument a chance with computer and technological advances seemingly giving way to new efficient ways of doing business, which ultimately puts a damper on inflation. But Al seems to waver back and forth on this new era belief.
Now let's go to Mr. Greenspam part 2, this at his Humphrey Hawkins Testimony on July 22:
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"The already shrunken pool of job-seekers and considerable strength of aggregate demand suggest that the Federal Reserve will need to be especially alert to inflation risks. Should productivity fail to continue to accelerate and demand growth persist or strengthen, the economy could overheat. One indication that inflation risks were rising would be a tendency for labor markets to tighten further. But the FOMC also needs to continue to assess whether the existing degree of pressure in these markets is consistent with sustaining our low-inflation environment. If new data suggest it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would only require a more disruptive adjustment later - one that could impair the expansion and bring into question whether the many gains already made can be sustained."
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Greenie is more concerned with core inflation, which has trended lower 1.6% this year vs. 2.4% last year after taking out energy costs.
Nevertheless, a tight labor market with increased wage pressures and continued strong growth will only intensify this debate. If firms can't raise prices because of no pricing power, how much more tight do the labor markets have to get to force firms to become even more efficient ? You can't squeeze blood out of a turnip, and that is what Greenie has done by not dealing with raising rates sooner or more forcefully than he has.
The coup de gra' is "asset inflation", which is bothering the hell out of G. We are still 40%+ overvalued bonds to stocks and this stares him in the face every day. Best he hit the problem head on now this month and raise one last 1/4 point when we have other noise distractions later this year starting with 9/9/99. He decided to avoid the issue last time, now the market will pay a higher price to the pied piper in the form of even lower equity prices than would have dealt the market last month. look at the bloodbath in the NuTZ. Can A.G. engineer another "managed" equity retracement without the wolf crying crash? The answer to that is he is trying his best to go out on top next July and he will whatever he can TO NOT RAISE RATES UNLESS IT IS ABSOLUTELY NECESSARY. Will the bond boys in Chicago or the treasury buyback do his bidding for him? Stay tuned.
Best, J.T. |
