You and I Engaged in a Kiss

JACKSON HOLE, Wyo. -- Picture, if you will, a beautiful beach.

Close your eyes and picture it.

You imagine daylight. Sun. Warmth.

Feel How It Trembles Inside

There ran yesterday on

Market News

a central-bank insight story. It contained the following nugget.

The Fed would much prefer to stay on a gradualist path. It does not want to chance overdoing tightening and risk unintended financial and economic damage. And it is hopeful the four 25-basis-point rate hikes made since last June, together with the rise in market rates and decline in stock prices that have already occurred and the further rate hikes already built into market expectations, will go a long way toward slowing the economy to a more sustainable "trend" pace.

But there is also a recognition that incrementalism can have its own costs and that more aggressive action could become necessary, just as in 1994, when the Fed followed three 25-basis-point moves by two 50-basis-point moves and a 75-basis-point move. In raising rates by 75 basis points at the Nov. 15, 1994, meeting, Greenspan argued that financial markets needed a "surprise."

One wonders.

Will we get through the current tightening cycle without seeing at least one big hike?

If you think the answer to that question is no -- and yes, IF is the biggest little word in the world -- then you'll want to game the timing.

When? When might one come?

An Ocean of Violets in Bloom

Things to consider.

(a) The behavior of the central bank in the past.

The first big hike in the 1994 tightening episode came on the fourth move of the cycle. We've already seen four funds-rate increases this time around, but one could reasonably argue that only one of them (the most recent one) was a "real" hike; the first three increases might more accurately be viewed as nothing more than reversals of freebies prior. In fact, the central bank framed both its

June and

August 1999 hikes in precisely such a take-back context. In that regard, then, this month's

meeting might be a bit too soon for the first big move of the cycle.

(b) The data.

Labor markets are tighter -- and final demand is stronger -- than they have been at any point since the current expansion began in 1991.

The published public-sector price indices do not scream for overly aggressive policy action the way they're printing now, but they also don't work against a big hike nearly as much as most folk think. When the central bank began tightening in February 1994, for example, the core (excluding food and energy) consumer price index was rising at a 2.8% year-on-year rate -- almost a full percentage point slower than the 3.6% rate at which it was rising a year earlier.

Many market participants do not know that the pace of consumer price increase had been slowing for a full year prior to the advent of the 1994 tightening cycle -- or that policymakers tightened aggressively four times even as that pace continued to slow to (what at the time marked) a 28-year low.

Policy rates can and do rise even while the price numbers print kinder and kinder. It's a fact worth keeping in mind.

(c) The strategy.

There are two months between the March and May policy meetings. This is a period during which we will see a surprisingly strong first-quarter GDP report; at least one bothersome employment report; one or two big consumption numbers; and perhaps an above-average core-price increase.

Does this tip the balance toward a big March hike? Or will policymakers be as content to wait it out now as they have been in the past?

Also: What would markets do on a quarter-point hike (would share prices soar)? What would they do on a bigger one (would the long end rally)?

Animals Strike Curious Poses

This column isn't a forecast. It's a guide.

IF you think we're likely to see at least one big hike during the current tightening cycle, these are some of the things you'll want to consider to figure out precisely when it might come.

Epilogue

Picture, if you will, a gloomy graveyard.

Close your eyes and picture it.

Night ... right?

Side Dish

Last guy picked?

Kidd.

Ostertag.

Gugliotta.

Van Horn.

Bill Bradley.