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Poole Gives the Market a 6% Scare

The 30-year Treasury finishes right on the black-magic number after a Fed member's hawkish comments.

It was a listless, uneventful day until

William Poole

spoke up.

Poole, the

St. Louis Fed

president and one of the most hawkish members of the

Federal Reserve

, today said he prefers when the market is prepared for interest-rate hikes and said he agreed with the market's assessment of the current inflation risks. In other words, look out on June 30.

The bond market, which spent the day clock-watching, freaked on the news, and pushed the 30-year Treasury bond's yield to 6% for the first time since May 11, 1998. The benchmark bond closed down 11/32 to 89 21/32. The yield rose 5 basis points to 6.00%.

"The ideal situation is when changes in

monetary policy do not take the market by surprise," said Poole, not a voting member of the committee this year, to an audience in Boston.

"He's definitely the most hawkish member, and so you can't take his view as the true mainstream read at the Fed, but nonetheless it's much more explicit than his past statements," said Mike Cloherty, senior market economist at

Credit Suisse First Boston

. "That 'By the way, I think you're right on for pricing in a Fed rate hike,' well, that was pretty open."

Poole's comments only add to the market's worry heading into two separate speeches by Fed Chairman

Alan Greenspan

, Monday and June 17. Originally, the market was looking at the June 16 release of the May

Consumer Price Index

as the last word on whether the Fed will raise interest rates. Unless the chairman explicitly rules out a rate hike at the June 29-30 meeting, the release now feels academic, analysts said.

"A lot of people are still anxiously waiting for the CPI next week, but it's probably too late for any kind of influence on the Fed," said Ken Fan, strategist at

Paribas Capital Markets

.

Poole is one of the Fed's stranger birds: He's one of the most restrictive when it comes to interest-rate policy, having dissented once last year in favor of a rate hike. At times, his comments are prescient; at others, he's completely out of line with the rest of the Fed. He's a monetarist, meaning he worries most about the growth of money supply and how it fuels spending. Monetarists believe that rapid growth in money supply leads to a level of spending that eventually results in price-related inflation.

"It's one of those views that everyone believes to some degree," said Cloherty. "But there's sort of a spectrum on how important a factor it is. He's at one extreme of that spectrum."

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The way the market's been reacting to Fed heads lately, the reaction isn't surprising. The market actually dipped slightly from hawkish comments this

morning from

Richmond Fed

President

Al Broaddus

, a monetarist who predictably believes that spending is above sustainable rates.

He's not a voting member, but

Minneapolis Fed

head

Gary Stern

, who speaks tomorrow in New York (to a group of reporters, no less) is. Stern falls on the hawkish side, meaning he favors a stricter, more restrictive monetary policy, but he's less overt about it than the likes of Broaddus.

Big Daddy Greenspan gets two important chances at the mike next week, first Monday, when he testifies before the

Joint Economic Committee

on technology improvements in the economy. More ominous is his June 17 address before the same committee on monetary policy and the economy.

The markets did not react to Sen.

James Imhofe's

(R., Okla.) statement today that he may hold up the nomination of

Lawrence Summers

as treasury secretary in response to

President Clinton's

appointment of

James Hormel

as envoy to Luxembourg. The president took advantage of a provision allowing appointments without confirmation when the

Senate

is in recess. Hormel is gay, and Imhofe said he would hold up all other appointments in protest.