Bill RE: 30 year bond yield going up. This piece in Barron's reminded me of your post and my reply to you.
interactive.wsj.com
Monday, March 2, 1998
An Economy Too "Finely Balanced" Produces a Foul Mood Among Bond Investors
By William Pesek Jr.
O Brave New World! William Shakespeare didn't have economics in mind when he put these words in Miranda's mouth. But recent trends in the U.S. economy are stirring up a dramatic and fascinating Tempest of their own.
Alan Greenspan, perhaps no Prospero but a magician in his own right, drew renewed attention last week to the brave new dynamics mysteriously restraining inflation. In fact, the Federal Reserve chairman made clear that the economy is so "finely balanced" that there's no way to tell which way rates are headed next -- if indeed they're headed anywhere.
A foul mood overtook bond investors as the translation sank in: There will be no cut in short-term rates, at least for now. "The Fed may not be certain where rates are headed, but, as Greenspan suggested, it certainly isn't down," says Mary Dennis, senior economist at Merrill Lynch.
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It's hard not to conclude that the risks in the economy are still to the upside," notes former Fed governor Lyle Gramley, now an economist with the Mortgage Bankers Association.
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Greenspan, too, is a bit unnerved by the sheer underlying brawn of the economy and cautions against placing big bets on a continuation of sunny economic times. To continually expect extraordinary economic improvement of the sort seen in recent years, he says, "is, I think, to press the edge of Murphy's Law."
The key question going forward, as Greenspan puts it, is whether the restraint building from the turmoil in Asia will be sufficient to offset inflationary strains that might otherwise result from the strength of domestic spending and tightening labor markets.
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What He Didn't Say
That message may not be out of character for the world's most powerful economist. But for Fed watchers, it wasn't so much what Greenspan said, but what he didn't say. There was less talk about potential economic drag from Asia and more focus on the worrisome domestic forces like employment growth. And the D-word -- deflation -- was noticeably absent from his discussion of the outlook. It also didn't help that Greenspan's speech ended with a warning about taking the risks of inflation lightly.
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The biggest unknown going forward is whether the low inflation trend will continue. A new survey by the National Association for Business Economists finds that fully 86% of its members think inflation is only temporarily subdued. And even with a slowdown in growth this year, a majority of analysts still expect the Fed to raise short-term rates in 1998.
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But as Cramer says those Bears at Barron's they are always WRONG!
Pancho |
