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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Enigma who wrote (10841)	4/28/1998 8:32:00 AM
From: Alex	Read Replies (1) \| Respond to of 116764

You may well be right. It may require a perception that somehow or other inflation has snuck up on the fed and they are seen as having moved too late. In that case I could see gold continue to rise along with rates (gold would be ahead of the curve). The problem of late has been that inflation was seen as falling, therefore rates could be lowered without gold rallying. But as bb says - what do I know : - ). .................. WHY GREENSPAN & THE FED MAY BE UNABLE TO SHIELD INVESTORS By JOHN CRUDELE ------------------------------------------------------------------------ THERE are a lot of reasons why the Federal Reserve will raise interest rates in the next few months or perhaps only weeks. But there are also a couple of compelling reasons why it can't. Stock prices got clobbered yesterday after the Wall Street Journal reported the obvious - that the Fed was getting concerned that the U.S. economy was too strong and might have to boost borrowing costs. The Central Bank and particularly Alan Greenspan have been bothered by the economy's power and, in particular, the stock market's contribution to the economic picture. As far back as the summer of 1993, for instance, a couple of Fed members were made the point men to go out and warn the world that the stock market was becoming a bubble. Even Fed Chairman Greenspan later felt it was necessary to weigh in with an opinion that the stock market was the beneficiary of "irrational exuberance." That was thousands of Dow points ago. If the Fed was worried then, what must it be now? For whatever reason, Greenspan has shut up about the market over the past couple of months. And that has annoyed a lot of people, both here and abroad, who are anxious not only about the bubble but also over what effect the bursting of that bubble would have internationally. The Economist, a renowned British magazine, last week warned about the repercussions of the bubble's demise. The publication didn't debate whether or not there was a bubble, it said - as this column has been saying - that the bubble exists and could survive only so long. And even the Japanese, with plenty of economic problems already, have been dancing around the issue of the U.S. stock market speculation. Eisuke Sakakibara, that country's vice minister of international affairs at the Finance Ministry, last week went out of his way to not comment on the bubble. Here, the Fed has enough members of its Open Market Committee who are worried that Greenspan has allowed the nation's money supply to grow too much for a healthy economy's sake. For instance, William Poole, the newly-elected president of the St. Louis Federal Reserve bank, is believed to be one of the so-called monetarists for whom the over-10 percent growth in the money supply is excessive. Because there is a one-month delay before the minutes of the Fed meeting are released, nobody knows what goes on there. But one can surmise that Poole and the other Fed bank presidents, who individually don't have the same clout as the Central Bank's governors, are annoyed that there is so much new money floating around. To them, what Greenspan has done is the equivalent of lowering interest rates to help the bubble form. The large money growth was, in other words, fuel on the fire. Worse, Greenspan has told friends that he's not really sure what the economy is doing. He's been claiming that the reliability of the government's economic data is being destroyed by fundamental changes in the nature of the U.S. economy. (I say it's because budget cuts have hurt Washington's ability to properly track the economy and because some of the more important numbers - particularly the monthly new job count - is being "spun" to look better.) Greenspan has probably been defending money supply growth and staving off a rate hike by arguing that even though the economy seems to be boiling, there isn't much inflation. In fact, certain prices - like energy - have been decreasing. But as this column has been saying for the past few years, most members of the Fed aren't concerned with the price of "things." What they are bothered about is the inflation in assets, particularly stocks. Those Fed members are very watchful for signs that these inflated assets are seeping out into the regular economy. And that seems to be exactly what's happening. Real estate prices in New York and other cities have soared. And people have made so much money in the stock market that even the market for more bizarre collectibles - like President Kennedy's underwear - has gotten irrational. As necessary and desired as a rate hike might be, extraordinary events could prevent the Federal Reserve from pulling the trigger. First, a rate hike here would cause the value of the dollar to soar. Currencies like the Japanese yen would be hurt. And that would hurt Tokyo's and the whole of Asia's ability to get their economies back on track. Even the hint of a rate hike has already been hurting the bond market here. And with the Japanese having so much of their assets invested in U.S. Treasury securities, a rate hike might force them and other Asian investors to repatriate their money. That, in itself, could cause interest rates here to rise a lot more than the Fed bargained for. Lastly, and most importantly, there is a another scandal about to hit the Clinton administration. And this - the Ken Starr impeachment report that sources say is still slated to be delivered to Congress sometime in May - could create so much uncertainty in the minds of foreign investors that an interest-rate hike on top of that might turn out to be a disaster too big to tolerate.