Greenspan Waiting Until After Election?
Reuters Online News - August 26, 2000 15:02
By Pierre Belec
NEW YORK (Reuters) - True or false? Federal Reserve Chairman Alan Greenspan is just waiting for this fall's election to roll by before taking another shot at bringing this hot economy down to a simmer.
Just don't bet the ranch that inflation-fearing Greenspan won't pull the interest-rate trigger again, experts say.
Sure, the economy is slowing with the latest numbers showing that the six interest-rate increases since June 1999 are putting the brakes on the fast-growing economy. For instance, orders for manufactured goods in July posted their biggest fall in history.
But the truth is that with crude oil prices shooting through the roof, Wall Street may be just one economic report away from the next inflation shock.
'`It's silly for people to think the Fed will not change interest rates again,'' says Richard Salsman, chief market strategist for Intermarket Forecasting in Cambridge, Mass.
``The biggest concern is the Fed will resume its punitive rate increases after the November election,'' he said. ``If it does, the market will be in bad shape but if it is truly done raising rates, it would say the stock market would bottom out right then.''
Indeed, post-election could be a nail biter. The Fed last pulled a sucker-punch on the stock market in 1988 when it waited until after the election to raise interest rates, boosting the fed funds rate to 8.75 percent from 8.25 percent.
Another scary thing is that Greenspan in the past has raised interest rates just to prove that the central bank was still ``relevant,'' Salsman said.
The central bank on Tuesday held one of its most suspenseless policy meetings and decided to keep interest rates unchanged. The move was not surprising because the Fed had tipped its hand weeks in advance, dropping hints the economy was slowing at a pace that made Greenspan happy.
Salsman estimates there's a 30 percent chance the Fed will raise by 25 basis points at the next three meetings -- in October, November and December.
Another analyst agrees.
``We continue to maintain what has now come to be quite a lonely position -- the Fed will have to continue tightening by the end of the year,'' says Kathleen Camilli, director of economic research for Tucker Anthony.
Her reasoning: Inflation. The consumer price index in July jacked up the inflation stakes,
moving the year on year inflation rate to 4 percent from just 2.7 percent for all of 1999.
``This is the highest rate of inflation since the 4.2 percent record in 1991,'' she said, citing the
inflationary impact of the resumption in the jump of crude oil prices after a brief mid-summer
pause.
``If this is the case, CPI could approach 5 percent year over year by December and when
combined with an ever-tightening labor market and signs of upward pressure on
compensation, we have the ingredients for a monetary tightening,'' Camilli said.
Over the past year, the central bank has been in a tightening mode, raising key rates by 175
basis points since June 1999, and boosting the cost of mortgage rates and unpaid balances on
credit cards.
Most analysts believe the Fed will stay on the sidelines until after the November election for
fear of being dragged into a political wrestling match.
Election Day 2000 falls on Nov. 7. The Fed's next policy-setting meeting comes on Nov. 15.
What would trigger the Fed into action would be startling economic numbers or political
events that flip the economy on its head.
A big drop in the dollar also would bring renewed Fed tightening because an unstable dollar
would jack up the price of a lot of imported stuff that Americans have gotten used to.
WIELDING THE 'SWORD OF DAMOCLES'
A critic of the Fed, Salsman said Greenspan in the past has shaped money policy just simply
to make sure that the central bank stayed ``relevant,'' citing a case in 1994, when the bank
had not increased interest rates for about five years.
Back then, the Standard & Poor's 500 Index was up a modest 9 percent and the stock
market's price-earnings multiple was at a reasonable 22. Inflation was sliding. The gross
domestic product fell and the jobless rate dropped.
Yet, staff economists at the policy-making Federal Open Market Committee told board
members that interest rates should be increased.
``The verbatim transcripts of the FOMC meeting in February 1994 showed that a couple of
Fed members were concerned that it was time for the bank do so something about monetary
policy because interest rates had not been changed for a long time,'' Salsman said. ``They
basically said, 'We haven't done anything all this time and it's time to do something.''
The transcripts, issued with a five-year delay, reveal a lot about the Fed's ``derisive attitude ...
and ``anti-market attitudes'' toward financial markets, he said. (Fed transcripts:
www.federalreserve.gov/fomc/transcripts/transcripts-1994.htm)
STIRRING THE POT JUST TO LOOK BUSY?
``No one saw actual signs of inflation,'' Salsman said. ''Edward Kelley (an FOMC member)
argued that the Fed should resume activism for the sheer sake of activism.''
Reading from the transcript, Salsman noted that Kelley commented the Fed needed a new
policy momentum.
``We have been in a momentum of rest for a long time. I think we need to change that and
now is the time to do it,'' the transcripts quoted Kelley as saying.
Greenspan agreed with Kelley on the need for activism but favored a series of small rate
increases rather than large hikes, afraid that steep increases would stun the stock market.
``I think it may be very helpful to have anticipations in the market now that we are going to
move rates higher because it will subdue speculation in the stock market,'' Greenspan told the
FOMC.
``At this particular stage, having expectations hanging in the market that we may move again,
and move reasonably soon, could have a very useful effect,'' he added. ``If we have the
capability of having a Sword of Damocles over the market, we can prevent it from running
away.''
The FOMC's 1994 discussions set the stage for a stunning jump in interest rates over 12
months that lifted the fed funds rate target to 5.50 percent from 3.25 percent.
Fast forward to the summers of 1999 and 2000.
The central bank has forced up the fed funds rate to 6.50 percent, with Greenspan warning
that there's a nasty inflation twist around the bend.
``I do think that there is still an element of politics at the Fed that says while the economy is
rolling along nicely, we need to be out there talking about things from a shrinking pool of labor
to stock market levels,'' Salsman said. ``There's a felt need to comment about everything that
is going on in the economy.''
Some critics are tempted to see similarities between the Fed's activism in the mid-90s and the
current money policy.
The Fed has now slammed the economy with six increases, which have driven interest rates to
their highest level in nine years.
All of this has happened against the background of the most productive labor force in
American history, which has kept inflation in check, and Greenspan's denial that the Fed is
targeting the wealth effect from a booming stock market.
The Fed chief thinks that the wealth created by five years of soaring stock market gains is bad
because it may cause prices to rise as demand for stuff exceeds supplies.
In the meantime, productivity and economic growth continues. Wall Street is still watching and
waiting for proof that the risk is tilted toward higher inflation.
For the week, the Dow Jones industrial average was up 146.15 points at 11,192.63. The
Nasdaq composite index gained 112.34 at 4,042.68 and the Standard & Poor's 500 index
was up 14.74 at 1,506.46. |
