The question, as you note, is definitely the trend going forward. Is the Fed simply going to nudge interest rates in order to maintain the growth environment, but at a slightly slower rate of expansion? Or does the Fed think inflation is such a threat that it will move more than once to stymie growth and keep a lid on prices?
In my role as an amateur Fed watcher, I'll be looking for indications the Fed gives about its role in the global economy. Historically, the Fed has interpreted its role fairly narrowly as guardian of the U.S. economy: Fed policy has been driven largely, almost exclusively, by domestic data and considerations. When the Fed and Treasury moved aggressively to combat the global meltdown last fall, it represented an interesting shift in Fed policymaking. (Of course, we owed it to the world, since our institutional investors put the global financial system at risk by accumulating such massively overleveraged positions -- a la LTCM.)
Seen in a vacuum, the U.S. economy is roaring and may well warrant a couple or three rate hikes over the next 18 months. But within the context of the world economy, which remains far more shaky than this year's market strength in Asia and Latin America suggests, the U.S. must still assume a role as international safe harbor -- and this makes aggressive tightening quite risky. If China devalues, it'd hit the global economy like an atomic bomb; and that would put us closer to August 1998 than the bliss we're enjoying today. This is hardly the only concern that looms on the global horizon.
There are two other considerations that I think carry significant weight. One is the Y2K problem. The government and media are both working hard to prevent a psychological collapse due to Y2K fears. Except for a couple of renegade senators, very few government types are expressing public concern about Y2K. "Everything is A-OK!" And the media is somehow controlling its sensationalist tendencies and largely playing down the Y2K story. "Let's look one more time at footage of that NATO 'smart bomb' blowing up some Kosovar refugees." Nonetheless, the Fed is quietly printing up billions and billions of dollars of cash, because it knows the withdrawals are coming. I'd imagine Greenspan will be cautious about killing the interest-rate environment just as we're heading for the Y2K scare.
Second is the election cycle. In theory, the Fed isn't designed to be subject to the political process. (This lack of accountability, in addition to its lack of transparency, is of course one of the great raps on the Federal Reserve system.) In practice, how eager will Greenspan be to inject himself into the elections by slamming the economy?
Anyway . . . my take on the situation right now is that we're going to see a rate hike, but I doubt we'll see a trend established unless the inflation picture deteriorates much, much more in the coming months.
You made the most important observation of all, though: all changes bring opportunities. Well said! |
