Greenspan doesn’t comment on Fisher’s statements, but that was the least of the probl
Greenspan’s speech to the IMC was wide ranging and focused heavily upon hedge funds and their impact on global markets when they start to consolidate and lose some of the wealth of their clients (his words, not ours). He also talked about how solid the US economy was even with headwinds from other areas. Okay; it is clear that Greenspan, at least in public statements, believes the economy is doing well despite slowing regional and national manufacturing and sluggish employment. At worst that means Greenspan sees the need for some more rate hikes. Of course if he goes overboard the worst case becomes even worse.
That leads to the other comments that really sent shivers through the office here. Greenspan again referred to the ‘conundrum’ of long rates falling even as the Fed pushed short term rates higher, clearing stating he did not understand why this was the case. After considering a few possible causes he more or less concluded it was foreign buying of US treasuries, i.e. the US acting as the bank for the world’s excess wealth, that was causing longer term yields to fall. With that in mind, Greenspan said he is not sure if the bond yield curve would invert, but if it did he added this time that he and the Fed would not assume that the yield curve is going to act or yield the same results in the past (e.g. a recession).
Wow. Think about what he is saying. He is saying that he doesn’t really know why long term yields are falling and potentially inverting the yield curve, but he is suggesting that it is different this time. You all know what we do when we hear that phrase with respect to the stock market: run don’t walk because a change is coming. It is frightening to hear the head of the most powerful central bank in the world saying that he is smarter than the market, that this time an inverted yield curve won’t mean what it has always meant in the past (recession). It is frightening to hear Greenspan casually speak of his willingness to test his theories using our hard earned money, our wealth, our retirements once more as guinea pigs.
He did this in the late 1990’s when he purposefully set about to slow the prosperity for fear it would generate inflation. After the market and economy crashed he admitted, though not as a potential cause of the crash, that the Fed was not sure if the wealth effect really would lead to inflation and asked for comments from the general public on this subject. Amazing and stunning, yet he appears about to embark upon the same path of testing theories out using our money.
This is what the market appeared to grasp in the afternoon even though the pundits were not picking up on it. Who cares really what Greenspan said about Fisher’s comments because everything else he said spoke to those comments and more. In short Greenspan is willing to hike rates even if the curve inverts, and it is clear that despite the signs of slowing here in the US and the bond and gold markets he feels the economy and inflation are strong enough to warrant continued, and as of yet unlimited, rate hiking. He may fully plan on stopping at 3.50% (two more 25 BP hikes), but the Fed stopping hikes in time is a rarity.
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