When the Obvious Isn't
MACON, Ga. -- Uhh, is your correspondent missing something?
Yesterday on TV, some animated
-lookin' wing nut was screaming that the
does not need to tighten -- and will not do so later this month -- because the fact that the yield on the 30-year Treasury now sits at 6.1% will do
work (slow the economy) for him.
We can safely label "thinking" like that stupid for (at least) three reasons.
(a) It's stupid.
In 1996, the
fed funds rate
averaged 5.30% and the bond yield
did that year? (Note that final sales equal personal consumption expenditure plus investment plus government spending; they represent the broadest available measure of final domestic demand.) They surged 5.4%.
In 1997, the funds rate averaged 5.46% and the bond yield averaged 6.61%.
Know what final sales did that year? They surged 5.4%.
In 1998, the funds rate averaged 5.35% and the bond yield averaged 5.58%.
Know what final sales did that year? They surged 5.7%.
Now, with the funds rate at 4.75%, there are many people (New-Era types and realists alike) who want you to believe that a bond yield of 6.1% is going to slow the economy materially.
Does that seem sensible to you?
Based on the rates and economic performances we've seen during the past three years, does the combination of a 4.75% funds rate and a 6.1% bond yield sound like a recipe for a material economic slowdown? One that will halve the rate of growth of final sales?
Uh-huh. Please pass the pipe.
(b) It's stupid.
spreads are decent predictors of economic growth: the wider the spread, the more bullish the growth signal.
The spread between the 10-year Treasury note and the three-month Treasury bill clocked in at 0.91% (or 91 basis points) in May. That marked its highest level since October 1997.
Not since last autumn, when Russia and then
hit, but since October 1997.
Like 19 months ago.
The spread between the 10-year note and the fed funds rate clocked in at 80 basis points last month. That marked its highest level since June 1997.
Not since last autumn, but since the whole Asian crisis thing hit.
Like 23 months ago.
Just shy of two years.
(c) It's stupid.
The economy doesn't slow materially all on its own.
Last month your narrator issued a
challenge to anyone (share peddlers and realists alike) spewing the same stupid drivel about the bond market doing the Fed's work for it.
He has yet to receive even one response.
That could well be because the handful or warped (and much appreciated) people who read this column don't have the time or resources to investigate.
Or it could be because rising market rates have never once produced material economic slowing in the absence of Fed action.
Tightenings taste like cod liver oil. But it is a fact that the economy (and shares, for that matter) did more than fine over a three-year period during which the funds rate averaged 5.37% and the bond yield averaged 6.30%.
It isn't clear that the rate outlook we face now is significantly worse than that, yet many participants are crying and whining enough to make this place sound like a big nursery.
So let's everybody just shut up and swallow the vitamins.
They're good for you.
Best attitude-adjuster for a whiny brat?
Talking and (or) a timeout.