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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club
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To: marc ultra who wrote (11638)2/2/2000 9:18:00 PM
From: MrGreenJeans  Read Replies (2) of 15132
 
Financial Times 2/3

Greenspan's grind

This is just the beginning. Though the Federal Reserve has now raised interest rates four times in just over six months, it is still behind the curve. Indeed, the only plausible reason why the Fed increased rates by a quarter rather than half a point yesterday is that a larger increase might have encouraged investors to believe its work was done, thus driving down bond yields and stoking the economic boom - the very last thing Alan Greenspan wants.

He is right to be concerned: the US economy is not slowing down. Nominal gross domestic product roared ahead at a 7.9 per cent annual pace between the third and fourth quarters of last year. Consumer spending, business investment and the housing market all remain buoyant. And after a miraculously low performance, inflation is at last beginning to creep up. The most recent gross domestic product data showed the core personal consumption deflator rising to an annualised 2.1 per cent, from an average 1.3 per cent over the previous 2« years.

The trouble is that, given spectacular equity returns, last year's modest interest rate rises have proved ineffective in slowing demand. The Fed therefore needs to see a sizeable decline in share prices before it can be sure inflation risks have been capped. Since its only weapon is monetary policy, this suggests that rates will have to keep rising until the market bubble bursts. A more hawkish Fed, determined to keep a lid on inflation at any cost, should be good for bonds: and indeed, Treasuries have staged a mini-rally over the past two weeks. But it is a miserable prospect for stocks.

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