All long-term rates have risen gradually since the Fed’s pause at 5.25 percent, the 10-year T-note from a 4.89 percent bottom to 4.96 percent, mortgages edging up from 6.5 percent.
Some of this rise is a natural rebound from a straight-line decline. A more ominous upward push has come from the Revolt of the Old Guys, a most unusual group saying the Fed’s pause is a mistake. Beyond mistake: delusional.
On Monday, the day before the pause, Martin Feldstein, certified old-hand, calm, disciplined, finalist for Fed chairman, wrote an editorial for the Wall Street Journal. Couched in the polite language of policy-making economists, Feldstein demolished Fed Chair Ben Bernanke’s rationale for a pause, swinging a velvet wrecking ball three times.
One. “Waiting for more data before deciding to raise rates is not costless.” Whatever you do, don’t let inflation get ahead of you.
Two. Referring to the Fed’s official forecast for economic growth continuing as is, above 3 percent, unemployment below 5 percent, and inflation simultaneously falling back to 2 percent or below, “Although this optimistic economic outlook is possible, it is unlikely.”
Three. Feldstein then called forth the Zeus and Jupiter of inflation fighting: “In assessing the current interest-rate decision, the Fed should recall that during the Volcker and Greenspan years the Fed pushed the Fed funds rate to 8 percent above CPI in the early 1980s, to 4 percent above in 1989, and to almost 3 percent above in 2000. That measure is now less than 1 percent.” You’re too easy to pause.
Certified Old Guys Allen Sinai and Laurence Meyer joined in, along with a raft of middle-agers, all on Feldstein’s line: inflation reduction doesn’t come cheap. Senior guys don’t publish stuff like this — not with a new Fed chairman, and in a tough moment — not unless they think Fed policy is badly misguided.
Just as unusual is formal dissent at a Fed meeting. The new president of the Richmond Fed, Jeffrey Lacker, did so on Tuesday. He’s the guy who spoke plainly and correctly about inflation fighting in the spring, when Bernanke was tangled in his soft-landing underwear. The day after Lacker’s dissent, his old-hand predecessor at Richmond, Al Broaddus, said he would have dissented, too. You can bet others would have dissented, but held back to cover disarray; this pause was Bernanke’s call.
The week’s data releases — strong retail sales in July, and inflation moving into labor costs — further undercut Bernanke’s position. Really, the only remaining element supporting him is the bond market itself; more data showing economic strength and spreading inflation, and the market will turn on him, too.
Upon exposure of the latest terrorist plot, financial markets did not flinch in the slightest — no fainting in the stock market, no running to Treasurys or gold for safety, no frightened spike in oil. These markets are emotional barometers, and it is good news that we are learning to live with the threat of terror.
We have a ways to go to understand “terrorism,” and what to do about it. One aspect is the spare-time amusement of nut cases, no different from the anarchists of 100 years ago, although modern society is more vulnerable, and some modern munitions more deadly. Another aspect is no different from murderous campaigning by the IRA and other political, ethnic or religious movements over centuries. Yet another aspect is state warfare by asymmetric means.
As we work to figure out effective responses to each form, it does no good to inflate the bad actors or to demonize each other, and the first step away from overreaction is to suppress the tug toward hysteria. For markets to make it through the thought of a dozen airliners blown out of the sky, cool and steady…well done.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.