James Strauss: Unanimous Consent Fed to Pass on Rates: Caroline Baum
quote.bloomberg.com
New York, June 26 (Bloomberg) -- It's that time again, when financial markets around the globe stop what they are doing, which isn't much, and turn their attention to the Federal Reserve's policy meeting on Tuesday and Wednesday.
No one expects the Fed to raise interest rates on the heels of the 175 basis-point increase instituted over the past 12 months. At the same time, everyone expects the Fed to issue a statement suggesting that the risks are weighted toward higher inflation.
So, summer markets already in need of inspiration, universally agreed on the outcome of the big event this week, are waiting for some out-of-nowhere news to trade on. Good luck.
The argument against raising rates at this juncture is well- founded. Despite assertions that the New Economy has dulled the power of interest rates -- based on an idiotic belief that companies that produce and earn nothing would be untouched by higher interest rates because they have access to venture capital and don't borrow -- the evidence suggests that the medicine is having its intended effect. Reports on economic activity in May -- everything from housing to manufacturing to retail sales to employment -- uniformly suggested that U.S. economic growth has started to downshift.
How much and for how long are still open to question.
``The recent softening in activity is insufficient in both duration and magnitude to force the Fed out of a tightening posture,'' says Susan Hering, chief economist at Carr Futures, Inc. in Chicago.
Which is why most folks believe that the Fed will be back in play by the following meeting on Aug. 22.
Period of Adjustment
Even if the June slate of indicators shows a marked pick-up from the anemic growth pace implied by May's, it's still not unusual for a central bank to pause in its tightening agenda. That old saw that policy operates with a lag still cuts wood (or is that bait?). And with the Fed lobbing in a 50-basis-pointer in May, a rest period is in order.
The July federal funds futures contract, at an implied yield of 6.56 percent, has removed all but a small chance that the funds rate will emerge from this week's meeting at 6.75 percent. In this era of no un-telegraphed Fed actions, it was incumbent on Fed chief Alan Greenspan to prep an unprepared market if he was going to lift rates again.
Instead, the chairman devoted his most recent speech on June 13 to extolling the virtues of productivity.
Greenspan was at his nerdy best when he spoke to the New York Association for Business Economists. He discussed the pros and cons of a ``disaggregated approach'' to national productivity measures, the probable mismeasurement of non-corporate productivity (ostensibly zero), the marked increase in ``multi- factor productivity,'' and the huge statistical discrepancy between gross domestic income and gross domestic product in the 1990s.
Structural vs. Cyclical
In the end, his conclusion was that advances in information technology in the second half of the 1990s engendered a structural increase in the rate of productivity growth above and beyond any cyclical improvement, the result of strong economic growth.
While Greenspan's alter-ego wasn't in evidence when he addressed economists on June 13, the tight-labor-market Greenspan is no doubt lurking on the B deck, right below the productivity- miracle Greenspan.
Speaking of productivity, I wish the chairman or any other technology aficionado would address the dark side of the productivity miracle, or what it's like to be a consumer trapped in one of those endless, information technology phone menus. The productivity of anyone on the receiving end is shot to hell. If the problem has to be taken care of during regular business hours, the worker's loss of productivity, magnified a thousand times over, will directly affect his firm's.
And even if the employee attends to matters on his own time, the experience is so debilitating that he can't do any work afterwards!
Productivity Test
To be sure, corporations pass on cost savings by creating value for shareholders. Still, someone needs to quantify how the wasted hours of trying to reach a real person, not to mention the sub-standard response when you finally do, factor into the equation.
With the Fed intent on slowing economic growth to a rate policy-makers believe is in line with its non-inflationary potential -- something on the order of 3 percent to 4 percent -- Mr. Greenspan's hypothesis that most of the increase in productivity growth has been structural will get a good test.
``If the Fed wants to slow output from 5 percent to 3 percent, are employers going to be quick to fire people they've had to beg, steal and coddle for years?'' asks Bob Barbera, chief economist at Hoenig & Co.
In 1995, companies shed workers with alacrity to protect productivity and profits, he points out. ``That was then. Now, with the unemployment rate at 4 percent, I find it hard to believe firms are going to be quick to lay them off. When business slows, it's not going to be good for the stock market.''
Ah. Stocks look like they're getting ready to celebrate the Fed's inaction with a big rally, even as bonds learn to love 6 percent. Some equity fund managers have already weighed in on how another 25 or 50 basis-point rate increase won't matter.
At least they'll say that until the economy slows on a sustained basis, at which point, without missing a beat, they'll proclaim that Alan Greenspan has overdone it, sowing the seeds of the next recession.
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I have a question:
After you fire workers because of rising Interst Rates,
how long will it take to get through
the information technology endless voice menus ?
Is it going to be " more endless? "
TA
Message #55446 from James Strauss at Jun 27, 2000 11:05 AM ET
el:
The New Highs/New Lows on both the NYSE and Nasdaq show a drying up of the New Lows... finance.yahoo.com
I think we are in a win win situation whether the FED goes Neutral or goes with a 1/4 point hike because the numbers are beginning to show that the first three or four rate hikes are having an impact the economy... That leaves the 5th and 6th rate hikes to yet take a bite out of the economy... If the FED truly wants to engineer a Soft Landing they'll err on the side of caution this meeting, or at worst, make this hike the last one... Since all this is already known by the market we move ahead...
The rising bottoms on the NDX are very bullish...
bigcharts.com.
Jim
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