Ramsey, I do not think that Greenspan is going to rush to lower rate (we'll see next week <G>). The problem of the world are due to excessive capacity in an environment where the major engine of growth in demand has been halted in its track. AG will lower our rates to stop a financial meltdown if it were to occur, but right now, I think he views the domestic situation as a "healthy retrenchment", or the soft landing he has always sought (and gotten quite often). Unless our unemployment rate seriously breaches 5%, or we actually experience two or maybe three consecutive months of declining leading economic indicators, he'll stand pat, IMHO. If he uses the rate reduction weapon now, he positions the US as the "sole" engine of excess capacity soaking, and both AG and the administration would want to see Japan instituting a policy of increased domestic demand in Japan to soak some of the excess capacity in the far east.
If the Dow breached 7200 and dropped to the mid 6000, then he might start and think about giving a signal that enough is enough and lower rates. Right now, the bond market lowered the rates for him and he need not move with Fed rates and overnight rates. I think he is afraid to use lowering interest rates prematurely so as not to get caught in a liquidity trap as Japan had been. He is leaving himself ample room to act (I would say that with current inflation even 4% would still be a high net interest rate) very gradually. The last thing Greenspan wants to see is the DOW back above 9000, and a strong easing signal may cause just such an explosion.
Many are urging AG to lower rates, but such rate lowering here will not have any positive impact on the crisis in Asia, Russia and the nascent crisis developing in South America and even Canada.
Zeev |
