Lots of speculation about Fed needs to be put in perspective
Drama, intrigue, mystery. Just the way Greenspan wants it. After the Fisher rally two weeks back Greenspan was in the batters box this week with two shots at undoing some of the good times unleashed by Fisher’s candor. Monday was nothing new, but Thursday Greenspan restated the ‘measured pace’ language in his delivery to Congress; he typically does not belabor a point nor tell Congress what the FOMC just said. He made a point to reiterate the FOMC’s position. Making a point.
But what was the point? That the Fed would continue to raise rates? As we noted last week, no one really believes the Fed is done. The Fed Funds Futures contract has two more 50 BP hikes factored in. Even Fisher said it was the eighth inning, implying another rate hike. He also noted there could be extra innings. That is completely in line with what Greenspan said. Greenspan says he is looking at the data month to month, and while he sees strength now (something that is arguable as discussed in the Thursday report), if the ISM slips below 50 that would likely tell Greenspan that the bond curve is not the conundrum he thinks it is. That would put the Fed on hold if not stop it altogether.
Friday former Dallas Fed president McTeer injected a bit of common sense into the speculation. He said that he would pause after one more hike and see how things responded. He does not believe that is what the Fed will do, but he does believe the Fed will raise just two more times, right in line with the FFF contract.
The economy is solid but it is not racing ahead. Indeed it is still slowing in some key areas even after it looked as if the March slow patch was long gone. It could likely go on with the expansion if the Fed stopped cutting rates and started putting water back into the money supply pool. With the added weight of rate hikes and no money in the pool, however, this economy just isn’t strong enough to keep on going. Just as in 2000 when the ‘red hot’ (excuse me while I go blow) economy was going to go on forever but then keeled over just months later under the weight of the Fed rate hikes and restrictions on money, this economy could suffer the same downfall because it is not as strong as Greenspan wants us to believe and Greenspan intends to raise rates to take back some of the cuts and give itself some breathing room. As noted Thursday, it will get the maneuvering room it wants just in time to have to use it to try and get the economy back from the slowdown or recession it caused. We can only hope the FFF contract is correct in its assessment.
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