Mortgage rates stayed about the same this week, 6.25 percent to 6.375 percent for the lowest-fee deals, but the underlying Treasury market deteriorated, rates rising, after a fierce speech by Federal Reserve Chairman Alan Greenspan.

“Fed Signals Aggressive Rate Stance” trumpeted The Wall Street Journal; true, but only as a conditional matter. Greenspan recited the Fed’s oft-stated faith that inflation will not accelerate in a troublesome way, and then said, “Should that judgment prove to be misplaced…” before threatening to tighten more and faster.

Some of you are old enough or young enough to remember the Lion’s growling and roaring assault on the Scarecrow, frightening the stuffing out of him until Dorothy scolded the Lion. Now, Greenspan is not exactly clutching his tail for comfort, but he is perfectly capable of feigned ferocity to get critics off his back.

A chorus has been rising for weeks in the markets, complaining that the Fed is “behind the curve” as an inflation-fighter, too slow to raise the overnight cost of money. Some of the chorus would benefit from excessive aggression by the Fed, notably bond traders who want any sign of inflation immediately squelched, and – even better – a Fed that tightens so precipitously that it caves in the economy.

I think Greenspan intended to remind the jackdaws that he knows his position relative to the tightening “curve” better than anybody, and long ago demonstrated that he is not afraid to hit the markets and economy as hard as necessary.

Greenspan had something more important to say, something missed in the headline stories. It was easy to miss because the comment came in question-and-answer after the speech, and the whole show was a teleconference from London. The chairman “noted the state of the current markets” in contrast to “the lack of preparation in the markets in advance of the monetary tightening in 1994.”

1994 is seared into the memory of all bond operators present at the time. The Fed funds rate had been a recession-fighting 3 percent since October 1992, the lowest since 1963. This extreme ease took the 30-year T-bond yield to a low of 5.79 percent, and it was stable at 6.3 percent for the three months before the Fed caught the market completely by surprise with a hike to 3.25 percent. We should have known it was coming: despite the recession, inflation was not under control, and the Fed was not about to let inflation rise in the post-recession recovery cycle. The Fed tightened all the way to 6 percent by January 1995, and 30-year T-bonds crested at 8.1 percent.

What was Greenspan trying to tell us in his contrast of today’s markets with 1994’s flat-footed surprise?

Try this. In ’94, the Fed was trying to squeeze out the last of inflation; today, the Fed is trying to nurture what little inflation there is, fresh from its 3-month-old reflationary victory. The Fed and the bond market know that the cost of money has to rise to some approximate “neutral” point, but unlike 1994, the bond market is leaning away from the punch. In 1994, the Fed-funds-to-bonds spread was 2.79 percent at the rate low, and 3.3 percent at the moment the Fed began to tighten. Today’s 30-year T-bond trades at 5.54 percent, for a funds-to-bonds spread of 4.54, an enormous anticipation of Fed tightening already built into long-term interest rates.

Today’s 30-year T-bond yield is only a quarter-point below its low the last time the Fed was at 3 percent (the 2001 unpleasantness excepted), and 3 percent is as good as anyone’s guess for where a “neutral” Fed funds rate might lie. The chairman was telling us that if he’s wrong about gradualism, he will change his mind; but either way, bonds have already absorbed most of the damage.

Whether gradual or lurching, most of the rate rise ahead will be in the form of a funds-to-bonds spread narrowing as Fed funds rise toward bond yields, not some rolling wreck in bonds and mortgages, like ’94.

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


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