I'm a Democrat but God bless Kemp.
That's OK, I like ya anyway. We can't all be right-(wing)<g>.
As I understand it, Greenspan does not actually wish to keep hiking rates. He really only intended a 25pt rise this last time, but was met with strong opposition by other fed board members (Clinton appointees, by the way), who intend to keep putting the pressure on to hike even more.
These articles were posted here previously, but thought it might be good for a re-read:
Best Regards,
KT
--------------------------------
To: RetireSoon who wrote (26118)
From: RetireSoon Friday, May 19, 2000 10:15 PM ET
Reply # of 26223
Kudlow: Fed Threatens Prosperity
By Lawrence Kudlow CNBC.com Chief Economist
cnbc.com.
If Robert Novak's syndicated column yesterday about the Fed is even partly correct -- and I believe it is -- then financial markets could be in for a bumpier near-term ride than most folks think. And certainly bumpier than our inflation-less prosperity deserves.
The estimable Mr. Novak, who is surely the most influential conservative journalist around, and quite possibly the number one media commentator of his generation, believes that Alan Greenspan is being pressured by President Clinton's Fed appointees into a new tightening cycle that will be much more aggressive than the Chairman wants.
Greenspan reportedly preferred only a 25-basis-point rise in the overnight federal funds rate. However, the Clintonite Gang of Three -- Laurence Meyer, Roger Ferguson and Edward Gramlich -- insisted on a 50-basis-point hike. Greenspan apparently decided to switch rather than fight. Even worse, the Fed announcement left the door open for another 50-basis-point credit tightening in June. And perhaps a third 50-basis-point move in August.
In the context of a rising dollar and a falling gold price, alongside surprisingly benign April inflation reports, there can be no doubt now that Fed policy is aimed directly at curbing economic growth. Buggy whips in hand, with bugles blaring, the Fed austerity brigade is armed with an old-economy Phillips curve designed to slay non-existent inflation by depressing the new Internet economy.
Ride on, fellas. Right out of a 1950s smokestack playbook. Too many people working. Too many people getting raises. Too much investment. Too much productivity. Too much -- prosperity.
There were even a couple days leading up to the last Fed meeting when the stock market appeared to be recovering. Of course, the market was signaling strong approval of George Bush's private investment account reform of Social Security. Good thing the Fed stopped that before it got out of hand. Much too good an idea.
Nearly 15 years ago a similar Fed story occurred, but in reverse.
Shortly after President Reagan appointed commodity price watchers Manley Johnson and Wayne Angell, they banded together with earlier Reagan appointees (Preston Martin and Martha Seger) to pressure Paul Volcker into an easier money policy.
Volcker nearly resigned, but then, like Greenspan, he went along. But then easier money was the correct course. Now, tightening overkill is a terrible idea. Is it possible that Mr. Greenspan is considering resignation?
As a footnote to the saga, Bob Novak pointed out that the "Super-hawks" want to move the fed funds rate upward in line with the growth in nominal GDP (total spending in the economy, which grew at an 8-percent rate in Q4, and 7.5 percent over the past year). This, by the way, is a view held by a number of Reserve Bank presidents, as well as the Clintonite Board members.
Consequently, Laurence Meyer & Co. may be preparing for a 7.5-percent or even 8-percent fed funds rate. So here's a warning: This harsh tightening mode is not yet discounted by financial markets. Not stocks or bonds. Both the fed funds and eurodollar futures markets are suggesting no more than 75 additional basis points of tightening, but certainly not 100 or 125 basis points.
Trouble is, by the time the Fed gets to an 8-percent funds rate, money and GDP growth will already be slowing. That's why looking through the rear-view mirror is such a bad idea. Forward-looking prices, such as gold and the dollar exchange rate, are much better inflation indicators.
The Meyer plan would be a very risky scheme. If this worst-case scenario comes to pass, then real economic growth in the second half of this year could drop below 3 percent. Even worse, next year's growth could hover around 1.5 percent. This is a long stone's throw from the 6-percent-plus growth of the past three quarters. And whenever we start down this slippery slope, recession can never be ruled out. Stocks won't like this one bit.
Mind you, this is still not my best-guess forecast. There is no inflation, and the economy appears to be cooling but not collapsing. Therefore, it is always possible that the monetary professors will seek Higher Guidance and come to believe in the benefits of prosperity. The economic numbers in the weeks ahead will be very important.
However, if the Laurence Meyer Phillips curve Gang of Three remains on a tear, then investors had better tighten their seatbelts. Cash is starting to look better and better.
Of course, an optimist like myself always looks for the cute little pony among all the manure. Where's the pony? The presidential election is less than six months away. Tax cuts and two unfilled Fed Board seats will be back in play.
It may well turn out that the Greenspan Fed is an equal-opportunity presidential unemployer. Bush the Elder has never stopped blaming Greenspan for his 1992 re-election defeat, though in truth Fed policy that year was much less important than his broken no-new-tax pledge.
As for campaign 2000, Al Gore's "it's the prosperity, stupid" mantra may go down in flames from Fed overkill. Oh well, every bear market has a silver lining.
------------------and---------------
POLITICS INSIDE THE FED. CNBC had a short
discussion/argument with Larry Kudlow and Bill Wolman
about Robert Novak's column today. Bill Siedman later
made a reference to this column also. Upshot is Greenie only wanted 1/4 point but new coalition of Clinton appointees/hawks outvoted him. Here's the column.
May 18, 2000
Greenspan's choice
WASHINGTON -- Going into Tuesday morning's meeting of the Federal Open Market Committee (FOMC), it is unlikely that Alan Greenspan felt like the master of the universe he is reputed to be. He had to choose between protecting his position as Federal Reserve chairman or following sound economic practice. It was no surprise that the man appointed by three presidents to head the central bank took the political course.
The FOMC, the Fed's policymaking body, certainly could not point to hard economic warning of inflation as the reason to raise interest rates by 50 basis points (or one-half of one percent), following six 25-basis point hikes in less than a year. Early Tuesday before the central bankers met, the latest non-inflation report showed a 0.2 percent increase in the Consumer Price Index. There is little doubt that Greenspan's personal preference would have been 25 basis points. But the hard reality is that the chairman is no dictator and did not have the votes.
The FOMC's majority insists on still higher interest rates, not because of access to secret inflationary statistics, but to slow down economic growth. There are signals that the Fed will keep putting on the brakes until a recession kicks in. Indeed, after 11 months of gradual tightening by the Fed, there are signs of a slowdown going into the general election campaign.
That's not what Al Gore wants. But he and his colleagues in the Clinton administration are muzzled by a tacit seven and one-half year compact that has proved mutually beneficial. Unlike past administrations, this one refrains from public recommendations, criticism or second-guessing regarding the Fed. In return, the conservative Republican Fed chairman has turned a blind eye to Clinton's tax-and-spend policies.
However, Democrats in Congress are under no such restraint. Sen. Byron Dorgan of North Dakota, Senate Democratic Policy Committee chairman and an old-fashioned prairie radical, took the Senate floor to close Monday's session and protested what the Fed chairman was going to do the next day: "Mr. Greenspan has sort of used himself as a set of human brake pads. His only mission in life somehow is to slow down the American economy."
Dorgan's heart is in the right place, but his understanding of Federal Reserve politics is faulty. Greenspan, no troglodyte banker, is an agile economist with a shifting viewpoint. He has been considered a believer in the "new paradigm," which does not equate economic growth with certain inflation, but most of his colleagues disagree.
The Fed's anti-inflation hawks are driving policy. Laurence Meyer, a former St. Louis economic forecaster and economics professor who was named a Fed governor by President Clinton four years ago, has been resolute in targeting economic growth. Meyer had the votes Tuesday, and it is doubtful that Greenspan could have overcome him. But he didn't try.
Not since an intransigent Paul Volcker was voted down by his colleagues on March 6, 1986, (in a decision to cut interest rates) has a Fed chairman been rejected and humiliated. That vote ended the Volcker era, and he left as chairman the next year. Greenspan, just reappointed for a third term by Clinton, will not take that path.
But what's next? Super-hawks do not want to stop with a federal funds rate (on lending between banks) set Tuesday at 6.5 percent. They contend that this interest rate should be at the same level as the nominal (that is, not adjusted for inflation) rate of economic growth, which is currently 8 percent. To follow such a painful course would mean climbing another 150 basis points in the immediate future. Nobody thinks that is possible, but Meyer and his colleagues seem determined to raise interest rates so long as the economy is growing.
In fact, despite the growth rate, there are ominous economic indicators. Retail sales and auto sales are both down. The loss by NASDAQ of one-quarter of its wealth certainly takes significant consumption money out of the economy.
Those were real numbers faced by Chairman Greenspan Tuesday at the Federal Reserve's marble palace. The conflicting set of numbers: the votes that were lined up against him by inflation hawks on the FOMC. The political choice was obvious.
¸2000 Creators Syndicate, Inc. |
