IN early summer this column said that it would take at least three interest rate hikes to keep the bond market happy – and more if Alan Greenspan actually was forced to do something to fight inflation.
There have already been two rate hikes, both of which caught Wall Street totally by surprise.
This week the Federal Reserve didn’t raise interest rates but indicated that its next move would be to push borrowing costs up again.
My guess is that the next hike will come at the November meeting. Then the Fed will take a break because it won’t want to do anything right before the Y2K controversy that’ll be swirling in December.
But there’s a good chance – let’s say 50/50 – of a hike before the November meeting if, say, Washington’s employment figures are too high or inflation indicators take the jump that I expect.
Then more hikes will be on the way early next year.
The bubbleheads on Wall Street are trying desperately not to understand what is going on. So they downplayed the Fed’s announcement on Tuesday that its “bias” had been shifted in favor of another rate hike.
The reason for the pros’ willing ignorance is simple: rising rates are already hurting the stock market, and anything that hurts equities hurts their business. In other words, the guys and gals who sell you stock want you to remain stupid.
Well, as part of my anti-stupid campaign, here are 10 reasons why rates will have to climb considerably more before the Fed can take a break.
1. The Central Bank had to cut rates three times, by 75 basis points, last year because of the financial mess created by Long-Term Capital Markets, the renegade hedge fund. That means another 25 basis point hike would only put rates back to where they were before Wall Street needed to be bailed out.
2. The Fed would not have had to make up for those three rate cuts if the markets didn’t care. But the bond market cared a lot. Interest rates have been climbing in the open market since last fall, a black eye for Greenspan and his merry band of policy makers.
3. Greenspan desperately needs to get back in charge of rates. He can’t continue to let the markets dictate rates to him.
4. Although there hasn’t been a peep yet about this, Greenspan’s sudden independence this year from political pressures probably means he doesn’t want to be reappointed to the Fed. So he can do anything he damn well pleases.
5. Greenspan has been unable to talk the air out of the stock market bubble. His warnings of “irrational exuberance” in the market have become as big a joke as his Whip Inflation Now (WIN) campaign during the Ford administration. Raising interest rates is the only thing that gets investors’ attention.
The market made Greenspan look foolish by rising sharply after this week’s Fed decision.
6. The Fed chairman’s buddies have been warning him for years that “asset inflation” – also known as irrational exuberance in the stock market – was a grave threat to price stability. The stock market is proving their point each time it rises irrationally
7. European central banks seem to be at odds with the Fed over policy. The European countries that last week announced they would no longer keep a lid on the price of gold – (like, who even knew that they were?) – guaranteed that the precious metal would jackrabbit higher. That means inflation, which means higher rates.
8. The price of oil remains in inflationary territory and is likely to rise even more as winter heating season approaches.
9. Since 2000 is a presidential election year, Greenspan will have to get rate hikes out of the way soon. The Fed doesn’t want to be Al Gore’s scapegoat.
10. Lastly, there really is inflation. An index kept by Geoff Moore, a noted economist and Greenspan’s former mentor, shows a cyclical upturn in inflation. The last time this happened in 1994, the Fed raised rates seven times. And they surprised the markets by raising rates once between their policy meetings.
Count on two more rate hikes, maybe three.