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Fed Up with Greenspan's Critics

Board Games

So what the hell are the


boys and girls doing today?

We know that at the conclusion of the


meeting tomorrow (right near 2:15 p.m. EDT) they will most definitely not announce that they have lowered rates. Nor are they likely to announce that they have raised them (though there is a far, far better chance of that than an ease). So what exactly are they doing all day today? And for half a day tomorrow?

Truth be told, Fed members are basically a stupid lot. But at least they keep themselves busy.

Indeed, since the beginning of the decade, and especially since the Asian crisis first struck about a year ago, they have been extremely industrious. They have been busy wasting way too much time on (and demanding way too much of) outdated economic models from the 1930s to manage monetary policy in this high-tech age of lasers and computers. They have been busy guarding against inflation (a phantom one, no less) so closely that they have become phobic about it. By not easing they have been busy trying to prove that the central bank is ignorant of the interlocking aspects of the global economy, trying to undermine world economic stability, and trying to promote further currency instability. By leaning toward tightening they are trying to prove that a strong job market is a bad thing, trying to undermine economic activity by keeping real rates too high, and trying to promote nothing short of an outright deflation.

And so these are probably the things Fed members are busying themselves with right this minute. Well, if you believe a small (but very vocal) wing-nut faction of the economics profession, anyway. Serious accusations, those. Yet they are the very charges being leveled against our central bankers. Amazing, then, is it not, that under the management of such a moronic Fed the economy has somehow managed to stumble into its 88th month of continuous growth (which makes it the third-longest expansion in our history).

One cannot help but wonder: What are the Fed detractors so angry about?

The work the Fed has done since 1989 merits nothing but first-rate marks. At every economic twist and turn


has maneuvered with a precision that would make any maze enthusiast envious. Yet when a Fed spokesman announces no change in rates tomorrow, many analysts will fault him for failing to lower them. And they will criticize him again six weeks from now when we learn that the Fed still holds a tightening bias (and that one or two FOMC members voted to tighten). But Greenspan is the one who brought us to the dance, and he has been nothing but a perfect gentleman, so he ought to be the one to drive us home.

Anyway, as for what's going on around the Fed conference table today and tomorrow, word has it that a heated game of


has broken out. Do you think anyone objected when Greenspan said he wanted to be the race car?

On Deck

National Association of Purchasing Management

numbers will be released tomorrow. Will the

Purchasing Managers Index

show a decrease? Other purchasing indices suggest so. The

Chicago PMI

fell to 52.9 from 56.3, the

New York

index fell to 54.5 from 54.9, and the


index fell to 23 from 35. But note that NAPM downside is probably limited. The

TheStreet Recommends

Philly Fed

index rose to 28.2 from 17.5, the


(American Production & Inventory Control Society) survey rose to 51.0 from 47.4, and the


index rose to 51 from 49. Also, note that the Chicago PMI fell 3.4 points in June. The last six times it fell this much or more (October 1997, February 1996, January 1996, November 1995, September 1995 and June 1995), the NAPM PMI fell only thrice (January '96, November '95 and June '95).

It is more clear that the

NAPM price index

will decline. Three of the other five price indices fell; Chicago prices fell to their lowest level since October 1985. Meanwhile prices across the energy complex (crude oil, fuel oil, propane and natural gas) were falling sharply (some as much as 20.0%) through mid-month.

As far as Asia goes, we can subtract the

import index

from the

export index

to get a rough idea of what the aggregate trade deficit is doing. The April gap stood at 6.6 and the May gap stood at 6.4. Another gap of this magnitude in June would produce a 6.5 Q2 average, which represents deterioration from the 5.9 Q1 average. Thus, the NAPM export and import indices are telling us that trade exerted a bigger drag during the second quarter than it did during the first.


We need to define the word


as it applies to a currency, because somewhere along the line it became a synonym for the word


(among other things).

When the members of the commentariat write, "Dollar/yen has stabilized," they mean, "The yen has stopped plunging for the moment." When analysts write, "Dollar/yen has stabilized," they mean, "I have stopped losing money for the moment." And when politicians emphasize the undesirability of "wild exchange-rate movements" and plead for "stability," they mean, "Please, God, let this stop."

Take Japanese Prime Minister


(please -- take him). Overnight he expressed exactly such sentiments because dollar/yen continues to taunt pre-June intervention levels. (At least with Hashimoto-san we don't get that patronizing attitude that seeps from


, who looks truly pained to have to relate this stuff to us. Hashimoto exudes the real frustration we can all relate to and emphasize with.) But he is not so much wanting less volatility for his currency as he is wishing a permanent new direction for it. Sadly, as long as "orderly" stock market selling (as opposed to "panicked" selling) means something, the yen can continue to sink slowly without being thrown into the same bin as the rupiah.

In short, a currency can be falling and still be entirely stable.

Side Dish

The good news is that the Japanese unemployment rate hardly rose at all in May after it rose during each of the three months before that. The bad news is that the May jobless rate (4.14%, up just a hair from 4.13% in April -- gotta love that Japanese two-decimal precision) represents a record high. Ditto the number of those without jobs, which now stands at 2.93 million (highest since government began keeping track in 1953). Meantime the number of employed fell 350,000 (0.5%) from its year-ago level to land at 65.97 million. On a year-over-year basis the number of employed has fallen for four straight months.