Bazdarich: Inflation just an excuse to curb growth:
cbs.marketwatch.com
Handicapping the Fed?s next move
By Michael J. Bazdarich, CBS MarketWatch
Last Update: 12:25 PM ET May 22, 2000 NewsWatch
Latest headlines
LOS ANGELES (CBS.MW) -- As stated in last week?s column, it is the course of the economy -- and not of inflation -- which will determine when the recent skein of Fed tightening moves will finally cease. See previous column.
History provides some clues as to when economic conditions will have progressed enough to placate Fed policymakers. Since the Fed first ?conquered? inflation in the early-1980s, there have been three episodes of major policy tightening.
After the severe recession and disinflation of 1980-82, the economy began a major rebound in the second quarter of 1983, with real gross domestic product growing at an 8.3 percent pace over the five quarters from the second quarter of 1983 through the second quarter of 1984. The Fed fretted that this rapid growth would accelerate inflation (it didn?t) and proceeded to tighten policy. This restraint gradually reined in the economy.
By the third quarter of 1984, GDP growth fell below 3 percent, though total job growth stayed strong through the end of that year. Besides the ?gathering? economic deceleration, Fed tightening was also ?restrained? by banking system problems emanating from the collapse of Continental Bank.
Opposite these factors, the Fed?s last tightening move was in late-August 1984. Bond yields prices, however, had peaked in May 1984 and declined through the Fed?s last few tightenings.
1987-89 episode
Slower economic growth and Fed easing then ensued until early-1987, when the economy picked up, as did Fed inflation fears. The Fed thus began to tighten vehemently in April 1987. It reversed course temporarily in October 1987 and after, opposite the stock market?s crash. However, when this event failed to curtail the economy, the Fed tightened again in 1988.
In response to these moves, GDP growth slowed on a sustained basis in the first quarter of 1989 and after. Total job growth also began to slow then. The Fed?s last tightening move was in mid-March 1989, though bond yields peaked (with the stock market) in October 1987 and reached a lower, mini-peak in August 1988.
1993-94 episode
After a modest recession in 1990-91, economic growth rebounded only slightly in 1992 and early-1993. However, with the emergence of robust growth in late-1993, the Fed-you guessed it -- began to tighten policy again to restrain inflation, real or imagined.
Economic growth remained strong through most of 1994, but slowed late in that year. GDP growth dropped to 1.5 percent in the first quarter of 1995, and total job growth dropped about the same time. While bond yields peaked in early-November 1994 and despite the slower early-1995 economic growth, the Fed was tightening policy through late-March 1995.
Again, in each of these episodes, it was rapid growth -- not inflation pressures per se -- which incited Fed tightening, and it was slower growth that appeased the Fed. Notice also that in each episode, bond yields peaked well before Fed tightening moves were complete.
Over these episodes, a slowing in both GDP and job growth was generally enough to stay the Fed?s hand. However, the timing fluctuated. Sometimes, the Fed ceased tightening before the slower GDP/job growth rates were ?hard? news; at other times, it continued to tighten even after they were announced.
The manufacturing employment indicator
One particularly reliable economic indicator has been manufacturing employment. Within the three episodes recounted above, factory jobs peaked in August 1984, March 1989, and March 1995, declining thereafter. Each such peak jobs coincided with the Fed?s last tightening. The manufacturing sector is especially sensitive to ups and downs in the business cycle, which is the main reason the gyrations in payroll jobs there have matched up so well with Fed policy.
What complicates the prospects of capitalizing on this correlation is the fact that factory jobs never have rebounded in the last two years. They showed their last real gains in early-1998, just before the onset of the Asian Crisis. Still, they did stop declining sharply in July 1999, and a roughly flat level of factory jobs since then has coincided with Fed?s tightening skein.
It is a sign of the perversity of Fed policy that it has taken declining factory jobs to satisfy policymakers, but that is the world we live in. When and as both real GDP and total job growth has slowed substantially, we can expect an end to Fed tightening moves. An early warning signal of such developments will be renewed declines in manufacturing employment.
My own guess is that these developments are imminent, but the data will tell one way or the other.
And - No sign of Inflation according to Fed minutes:
No evidence of inflation, FOMC minutes show
Fed saw moderating markets in March
By Rex Nutting, CBS MarketWatch
Last Update: 3:24 PM ET May 18, 2000 Bond Report
Economic Preview
WASHINGTON (CBS.MW) -- A softer stock market was seen by members of the Federal Open Market Committee as a key factor behind slowing consumer spending and economic growth during deliberations at their March 21 meeting, minutes released Thursday revealed.
The FOMC raised the Federal funds by 25 basis points at the meeting on a unanimous vote, although some members expressed said a 50 basis points hike would be needed at some point. A larger rate hike was ruled out immediately because of "unsettled financial markets." Read the minutes.
Updated:
5/22/2000 5:14:24 PM ET
In March, the central bank's policy-making committee said it saw "little evidence to date of any acceleration in core inflation," the minutes said. However, "members expressed concern about indications of a less benign inflation climate."
Stocks draw scrutiny
The FOMC noted that the stock market had risen between February and late March but expressed the view that "the large increases of recent years were not likely to repeated and [that] an absence of such gains would have a restraining effect on consumer expenditures over time," the minutes quoted members as saying.
By the same token, however, some members "expressed concern that the historically elevated valuations of many high-tech stocks were subject to a sizable market adjustment at some point."
That point came about three weeks later, when both the Nasdaq and the Dow fell sharply.
The Fed policymakers said consumer spending would likely continue to be strong even without further gains in the stock market, fueled by "further increases in household incomes along with lagged wealth effects of the sharp earlier advances in stock-market prices."
cbs.marketwatch.com
when reading the minutes you conclude that these people have little idea what they are doing
they do know how to screw stock prices and prevent further leeching from the banking sector, though (at the expense of the US Govt's borrowing power - which does nothing more than create a heavier tax burden for US tax payers as increased borrowing costs yields sustained tax load - i might add). |
