Greenspan....<OT>
This is way off topic...but I'm interested if anyone else has seen signs of a "grass roots" effort to try and influence the FOMC that higher interest rates are not in the best interest of our economy. There have been a few messages that I've seen on other boards where investors want to start an email/letter campaign to let their feeling be known to the appropriate agency/Senator. I know that the email/letter campaign several years ago to the FCC made a difference when the telephone companies were trying to force a charge for email between states. The telephone companies wanted the email sender/receiver to pay a fee for every email sent...as if it were a phone call.
There have been several articles recently criticizing the 50 bp hike...and suggesting that this hike was politically motivated. One of the strongest articles I've read was written by Lawrence Kudlow CNBC.com Chief Economist. Here is his recent article:
By Lawrence Kudlow CNBC.com Chief Economist cnbc.com.
If Robert Novak's syndicated column yesterday about the Fed is even partly correct -- and I believe it is -- then financial markets could be in for a
bumpier near-term ride than most folks think. And certainly bumpier than our inflation-less prosperity deserves.
The estimable Mr. Novak, who is surely the most influential conservative journalist around, and quite possibly the number one media commentator of his
generation, believes that Alan Greenspan is being pressured by President Clinton's Fed appointees into a new tightening cycle that will be much more
aggressive than the Chairman wants.
Greenspan reportedly preferred only a 25-basis-point rise in the overnight federal funds rate. However, the Clintonite Gang of Three -- Laurence
Meyer, Roger Ferguson and Edward Gramlich -- insisted on a 50-basis-point hike. Greenspan apparently decided to switch rather than fight. Even
worse, the Fed announcement left the door open for another 50-basis-point credit tightening in June. And perhaps a third 50-basis-point move in
August.
In the context of a rising dollar and a falling gold price, alongside surprisingly benign April inflation reports, there can be no doubt now that Fed policy is
aimed directly at curbing economic growth. Buggy whips in hand, with bugles blaring, the Fed austerity brigade is armed with an old-economy Phillips
curve designed to slay non-existent inflation by depressing the new Internet economy.
Ride on, fellas. Right out of a 1950s smokestack playbook. Too many people working. Too many people getting raises. Too much investment. Too
much productivity. Too much -- prosperity.
There were even a couple days leading up to the last Fed meeting when the stock market appeared to be recovering. Of course, the market was
signaling strong approval of George Bush's private investment account reform of Social Security. Good thing the Fed stopped that before it got out of
hand. Much too good an idea.
Nearly 15 years ago a similar Fed story occurred, but in reverse.
Shortly after President Reagan appointed commodity price watchers Manley Johnson and Wayne Angell, they banded together with earlier Reagan
appointees (Preston Martin and Martha Seger) to pressure Paul Volcker into an easier money policy.
Volcker nearly resigned, but then, like Greenspan, he went along. But then easier money was the correct course. Now, tightening overkill is a terrible
idea. Is it possible that Mr. Greenspan is considering resignation?
As a footnote to the saga, Bob Novak pointed out that the "Super-hawks" want to move the fed funds rate upward in line with the growth in nominal
GDP (total spending in the economy, which grew at an 8-percent rate in Q4, and 7.5 percent over the past year). This, by the way, is a view held by a
number of Reserve Bank presidents, as well as the Clintonite Board members.
Consequently, Laurence Meyer & Co. may be preparing for a 7.5-percent or even 8-percent fed funds rate. So here's a warning: This harsh tightening
mode is not yet discounted by financial markets. Not stocks or bonds. Both the fed funds and eurodollar futures markets are suggesting no more than
75 additional basis points of tightening, but certainly not 100 or 125 basis points.
Trouble is, by the time the Fed gets to an 8-percent funds rate, money and GDP growth will already be slowing. That's why looking through the
rear-view mirror is such a bad idea. Forward-looking prices, such as gold and the dollar exchange rate, are much better inflation indicators.
The Meyer plan would be a very risky scheme. If this worst-case scenario comes to pass, then real economic growth in the second half of this year
could drop below 3 percent. Even worse, next year's growth could hover around 1.5 percent. This is a long stone's throw from the 6-percent-plus
growth of the past three quarters. And whenever we start down this slippery slope, recession can never be ruled out. Stocks won't like this one bit.
Mind you, this is still not my best-guess forecast. There is no inflation, and the economy appears to be cooling but not collapsing. Therefore, it is always
possible that the monetary professors will seek Higher Guidance and come to believe in the benefits of prosperity. The economic numbers in the weeks
ahead will be very important.
However, if the Laurence Meyer Phillips curve Gang of Three remains on a tear, then investors had better tighten their seatbelts. Cash is starting to look
better and better.
Of course, an optimist like myself always looks for the cute little pony among all the manure. Where's the pony? The presidential election is less than six
months away. Tax cuts and two unfilled Fed Board seats will be back in play.
It may well turn out that the Greenspan Fed is an equal-opportunity presidential unemployer. Bush the Elder has never stopped blaming Greenspan for
his 1992 re-election defeat, though in truth Fed policy that year was much less important than his broken no-new-tax pledge.
As for campaign 2000, Al Gore's "it's the prosperity, stupid" mantra may go down in flames from Fed overkill. Oh well, every bear market has a silver
lining."
Libbyt |
