Skip to main content
Publish date:

Anecdotal Inflation

Despite the Fed's tightening, liquidity remains ample, sentiment is ebullient and the market keeps roaring.

Behavior in the bond market these past two weeks has been bizarre. But bonds are a competitive game featuring players both big and small, and the tactics employed can be aggressive and rough. It should not be a shock to see arms and legs get broken or even to witness the occasional fatality. Remember

Long Term Capital Management


But the transcontinental transmission of an explosive bull market in lawyers is what has been really weird. The spectacular increase in compensation of associates that started in Silicon Valley -- to keep them from decamping to dot-com start-ups -- has spread like a flu virus across the country to New York, Washington and other cities where the species tend to cluster. Early-responding law firms announced raises of 25%, but have been trumped by the 40% boosts declared last week.

The first question that strikes me is what good is an economics education? Lawyers are in excess supply, to judge by the jokes featuring them, so their price should be going down. But last week was not one characterized by declining prices, no matter where you looked. Stock and bond prices were up, despite a


rate hike. Heating oil delivered to my home was $1.89 per gallon; the prior delivery, two weeks ago, was $1.19. Haircuts went from $12 to $15. Maybe a 25% increase for haircuts doesn't seem like much against the increment to wealth implied by last year's 86% gain in the


, but for me it's about even on a per hair basis.

There was little in the way of wage inflation evident in the January employment report, as average hourly earnings slipped to 3.5% compared with those of a year ago. (Tell that to the partners of those big law firms; better yet, warn their clients.) But this indicator is ever more at odds with the anecdotal evidence, such as


TheStreet Recommends


(F) - Get Ford Motor Company Report

intention to offer a personal computer with color printer and Internet access for $5.00 a month to each of its 350,000 employees worldwide. There are motivations for Ford other than the competitive retention gambit of the law firms, and the cost of the program won't find its way into the average hourly earnings numbers. Nevertheless, it is a compensation expense (unless Ford knows how to make money at $5.00 per month) and another anecdote that contradicts the notion of tame labor costs.

The combination of 387,000 new jobs, moderately higher wages and a somewhat longer workweek generates a vibrant tone for the first quarter's economic trend. Total nonfarm hours worked should be up more than 4% this quarter and therefore so should GDP, yet again, unless the positive trend in productivity goes into reverse. Total wage and salary income is on track to grow vigorously, which will support or elevate the historic highs in consumer confidence survey results.

The inflationary potential of this self-reinforcing momentum in private-sector income and demand is worrisome to the Fed, according to the boilerplate of its post-FOMC meeting press release last week. After announcing a fully expected, fully discounted 25-basis-point Fed funds hike, the Committee said it remained "concerned that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth." One day later,

Alan Greenspan

was confirmed by the Senate to serve a fourth term as chairman, receiving in the process Sen. Phil Gramm's praise as "the greatest central banker in the history of the world."

Opinions to the contrary are certainly in the minority these days. Yet it's disturbing to hear and read perspectives, now quite common, that maintain that the Fed is less relevant than it used to be, less in control, less to be feared. It tightens and the markets rally, perhaps because it's still seen as the markets' reliable friend, to be counted on to ease in times of turbulence, and not to tighten in a manner that might put economic expansion and the bull market at risk. The glorification of the man and the abasement of the institution seem to be going hand in hand.

There is now full conviction that the Fed will take in another 25 basis points of slack at its March 21 meeting. Forecasts now seem to range from "that will be the last one" to "three or four more like it this year." I would expect this prospect to induce caution, if not fear, in market participants, but that doesn't seem to be happening. Despite the Fed's tightening actions, liquidity remains in ample supply, sentiment remains ebullient and trading volume continues to establish new records. I know in my marrow that the Fed is not irrelevant, but last week it certainly seemed to be.

Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at