Friday, September 22, 2006

Greenspan Puts ...... Again

Rumor in the market today was that Greenspan told a hedge fund group that the Fed was not concerned about inflation and would inject liquidity into the system if the housing slump turned serious. Serious is in the eye of who is slumping (the next town, the neighbor, or me), and how much liquidity is enough to combat the slump. If it were serious, history has proven it would be more than a 25 bp drop.

Earlier this year, Greenspan gave a private talk that became public when he said the Fed would pause by June and then start easing about 6 months later to stem the weakness in housing.

Since that scenario has played out thus far, it is tough to ignore the rumored comments. The bid/offer for an ease by December is 14/24 after settling at 12 yesterday (Dec Fed funds digitals). The puts are still trading at 6.

How ready is Bernanke et al ready to jump in and ease to save people who took the housing boom a bit too seriously in terms of financial leverage?

During the 90s one of the mantras feeding the equity market was the perceived Greenspan put. That is, he would ease if the market faltered thereby removing downside risk. It is not clear to me that the current group sitting around the FOMC table every six weeks is of the mindset to create a free put on housing for real estate speculators. For one thing, jumping in so quickly puts a floor on inflation, which at least the Richmond Fed is still concerned about, and an ease now does nothing to solve the negative saving rate problem.

I am still of the mindset that rates are low enough, general economic momentum strong enough (now bouyed a bit by lower energy prices and lower yields) that the economy will exhibit enough growth to keep the Fed exactly where it is.

The upcoming employment data will again be important. Signs of weakness there would push the Fed towards an ease before year end. Another 125,000 number, 5.25% as far as the eye can see --- or at least till the following month's data.


Rajesh Raut said...

Cutting interest rates in the next six months would be a serious mistake. At current levels, there will be some slowdown in the economy but not enough to lower inflation, the drop in housing sales not withstanding.

The drop in oil prices is due to seasonal factors (mid point of hurricane season, end of summer gasoline), not any fundemental shift in overall demand.

If you believe in inflation targets, as the Chairman of the Federal Reserve claims he does, then the next Federal Reserve meeting would raise interest rates by 25 basis points.

Anonymous said...

leads and lags, like making soup, sometimes it just takes time for all the ingredients to blend and create something worth eating. no reason to raise rates, and probably no reason to lower them either -- unless employment falls off a cliff.