The vertical trace on the bond market EKG after the Fed’s Wednesday meeting took mortgages up a quarter-percent, but rates held in the fives, and the more durable damage has been to stocks.

The Fed’s substitution of “patience” for “considerable period” was a smart piece of central banking. The Fed would someday inevitably have to abandon the “considerable” handcuff; it’s far better to do so now, a long ways (I hope) before actually having to increase the cost of money. Now the Fed can return to useful post-meeting statements that are descriptive of the economy and monetary policy, and I expect them to deploy a thesaurus full of successive synonyms for “patience” in order to avoid a new handcuff.

More important than the Wednesday’s shift from “considerable” were the minutes of the Fed’s December meeting, which describe a “changed assessment” to belief in an improving economy and “substantially reduced” chance for unwelcome disinflation. The key sentence in the minutes: “At some point, a move in the direction of a less accommodative and more neutral posture might be necessary.”

That point is closer now than it was in December, and the Fed’s very precise language frames what is probably a heated debate inside the Fed. At 1 percent Fed funds, the Fed is “easy,” “accommodative,” and stimulating the economy. How much of that accommodation can the Fed withdraw without harming the economy? Where is neutral? How long can the Fed wait to raise its rate to neutral without risking the 60-year bugaboo, an “overheating” economy? Or risking a new financial-market bubble, which of course the Fed insists that it would not try to prevent?

Nobody knows the answers to any of these questions because the economy is in a situation without precedent in the modern, post-WWII era of the Fed. Inflation is too low, and the Fed hopes to encourage the inflation rate to rise within the range of stable prices, from slightly under 1 percent to about 2 percent, but not to 3 percent. What sequence of manipulation of the overnight cost of money will achieve that objective?

We and the Fed will know, when and if we get there.

In this week’s data, the 4th quarter 2003 GDP came in at 4 percent, at least 1 percent less than the general range of optimism. The GDP’s best inflation measure (the personal consumption expenditure deflator) rose at an annualized .6 percent from the prior quarter, down from the prior two, and as low as any since the bubble blew. Orders for durable goods fell by a surprise 5.1 percent in December after the surprise 2.8 percent drop in November. Housing is still strong, and there are anecdotal bright spots in corporate R&D spending, an uptick in help-wanted ads, the well-behaved pace of layoffs, and medium-positive consumer confidence.

Yet, there is a sense of fragility. Stocks are today 250 points off the post-9/11 high set early this week. Values are extreme despite big earnings, the S&P still 20 times forecast. My favorite whipping stock, Amazon, made $35 million in 2003; its $53/share times 429.4 million shares is a market cap of $23 billion. Gold is under $400/oz for the first time since November, down from $425.

The IT revolution has brought unimagined flexibility to American business: we can all run faster without hitting capacity constraints in labor, material or production. Until whole industries run into constraints, competition prevents price increases. All eyes are on job growth (the next play in that roulette comes next Friday morning), but I think jobs are not quite so central.

Prices, prices, prices! The Fed doesn’t dare do much, not until prices themselves begin to move. The Fed dares not take pre-emptive action against inflation for fear it would pre-empt what little inflation there is.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at


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