May 2006 Archives

"Here rests in honored glory, an American soldier known but to God." --inscription on the Tomb of the Unknowns at Arlington National Cemetery

I took this photo in April 1989.

It is amazing to think that with modern DNA technology there will probably never be another unknown soldier. Indeed, the unknown soldier of the Vietnam War was identified in 1998 as Air Force 1st Lt. Michael Joseph Blassie. In a hundred years, people will wonder how it was that these remains could not be identified. That will matter little to the members of the "Old Guard" who will still keep their silent vigil. Only the whispers of the visitors, the 21 steps of the guard, and the clicking of his heels punctuate the stillness. Thus it will remain.

Blogging has been light for a while so that I can work on some other projects. I do plan to resume a more typical posting schedule now. I've been thinking a lot about fiscal policy lately and will post some thoughts on that soon. Of course, we've got another month to go before the FOMC meets again. But I have to be honest. Nothing in the last few days worth of data has changed my opinion that another rate hike is more likely than not. See, for example, this post by David Altig on the PCE. The May employment report is probably the next data point of sufficient importance to potentially shift the prevailing winds. What about the recent report that GDP rose faster than we thought? Old news. Inventories were building up faster, and the revised number probably includes some effect from the hurricanes last fall. It doesn't do much to strengthen the case for a pause, but neither does it make me want to slam on the brakes.

Much more to talk about later in the week. In the meantime, have a great Memorial Day.

For the first time in two years we enter the period between FOMC meetings not knowing whether a rate increase is coming. It would indeed be foolish to think that the Fed is finished raising rates for this cycle. One can easily imagine scenarios where we see one or even two more increases before this fall. The language in the FOMC statement is new, however:

The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

In other words, welcome to the world of data dependence. Notice also that there is nothing in the statement about the risks to price stability and sustainable growth being in balance. Last Friday's employment report notwithstanding, the Fed seems fairly confident in the ability to economic growth to continue. The FOMC's opening paragraph states:

Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Despite what a lot of people would have expected, the stock market has barely budged. They seem to be taking the news like grown-ups. That's good to see. Maybe Bernanke is getting through to them after all. Even the 10 year bond is up 2/32. From certain corners comes a sigh of relief that the Fed hasn't gone "dovish" on us.

Indeed they have not. I wouldn't be at all surprised to see another increase in June. Neither would King. It's just that now it's not a sure thing. It's about to get a little more exciting for Fed watchers than it has been in the last two years--more exciting than it has been since I started this blog. Throw away the record books--it's a new ball game. None of us knows what will happen in June, but each data point tightens the noose one way or the other. I will say that I think the bias is still towards a little more tightening. I'm inclined to expect another increase unless a preponderance of data points the other way. If the data remains status quo, then onward we climb--at least for a while.

UPDATE: Mark Thoma remarks:

The bottom line? I expect a pause at the next meeting if the Fed observes signs of the anticipated slowdown and if inflation remains moderate. However, they are very careful to signal that nothing is set in stone, the next move will depend critically on observations of the current and expected future state of the economy.

The question is how much of a slowdown and what level of inflation would trigger a pause? There will be no new GDP data before the next meeting, though there are other monthly indicators such as industrial production, manufacturers orders, sales, and inventories that will be important. There's only one employment report between now and the next meeting, and I don't think that they will pin everything on that. Inflation, I think it is safe to say, is the main point. There are a number of ways to look at it, and that should keep us busy for a few weeks.

UPDATE 2: David Malpass of Bear Stearns writes in the Wall Street Journal that the Fed should have been more aggressive in 2005 and now they're paying the price. In his mind, it has everything to do with the strength of the dollar.

NY Times Obituary

Louis Rukeyser, the exquisitely tailored and pun-loving television host who helped millions of Americans believe that they could get rich in the stock market, or at least begin to understand it, died yesterday at his home in Greenwich, Conn. He was 73.

He died of multiple myeloma, said his brother Bud Rukeyser.

When "Wall Street Week" was broadcast for the first time on Nov. 20, 1970, probably nobody, not even the always self-assured Mr. Rukeyser, dreamed that the show would run for 32 years while attracting the biggest audience on public television and making its host a celebrity in the improbable field of light-hearted, free-market-oriented financial commentary. The Dow Jones Industrial Average was then languishing, and the population of American mutual funds numbered a scant 323.

And though the Dow continued to languish (not until 1982 did it push above 1,000, a mark it had first set in 1966), "Wall Street Week" prospered. "I invented the job of economic commentary on television," Mr. Rukeyser said in 1980. He was already well along in inventing the medium of investment broadcasting.

I started watching W$W in college and was a faithful viewer throughout my grad school days. When I think about the show, I can still hear the theme music in my head ("TWX in Twelve Bars"). Sure there are lots of other financial pundits with their own shows now. But Rukeyser did it first, and in a lot of ways did it best. It wasn't a fast paced spectacle with a ticker running on the bottom of the screen. It was thoughtful, deliberate, and perfect for a Friday night.

Shortly after being fired by PBS, Rukeyser appeared on "Larry King Live". When asked by a caller how he would like to be remembered, Rukeyser answered,

I would like to be remembered as a guy who always leveled with his audience, who tried to represent the customer and nobody else, and who gave it to people straight, no matter who it offended.

Read CNBC's version--after all, they are part of the story...

Federal Reserve Chairman Ben Bernanke -- via CNBC's Maria Bartiromo -- managed to shock the financial markets into a pullback this afternoon.

Bartiromo, on CNBC's "Closing Bell," said the Fed boss told her at the White House Correspondents Dinner on Saturday night that the markets misunderstood him last week to say the Fed is done raising interest rates.

Bernanke told Bartiromo he found it "worrisome" that anyone would think of him as dovish. He said that he and members of the Federal Open Market Committee, the Fed's rate-setting body -- were trying to create flexibility so the Fed can choose whether to rates or not.

See also: Calculated Risk and Big Picture.

Vindication is always nice. I said last week, among other things, that Bernanke's comments were "necessary...but not sufficient" for a pause. I think the market overreacted and today they got their hand slapped. Dave Altig's probability charts are probably getting whiplash, but such is life on the knife's edge.

As for Bernanke giving an exclusive market moving story to Bartiromo--and let's be honest, that's what it was--I'm not crazy about that at all. That's about all there is to say about it.