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James Cook interviews silver market analyst Ted Butler
Fed May Pause Too Soon
By Irwin Kellner
CBSMarketWatch.com
Tuesday, November 29, 2005
http://www.marketwatch.com/news/story.asp?guid=%7BFFDEA816%2DE11F%
2D47A8%2DA66D%2DBDA8E32812DD%7D&siteid=mktw
Is the Federal Reserve laying the groundwork for halting the
extended rise in short-term interest rates? And, if so, why?
Those who make a living scrutinizing the entrails of the Federal
Reserve are getting all excited. The reason: they think they have
detected a number of signs that point to an early end to the long
series of interest rate increases that began back in the middle of
2004.
To be sure, no one expects the Fed not to raise rates when its
interest rate-setting Federal Open Market Committee meets on Dec.
13. And only a handful of financial market participants think the
Fed will hold rates steady at the conclusion of the meeting that
follows at the end of January, which will be the last one presided
over by Fed chair Alan Greenspan before he retires.
But the financial markets have suddenly increased the odds that the
Fed will stop raising rates, once the federal funds rate hits 4.50%,
which it is likely to reach come Jan. 31. Previously, they were not
looking for such a hiatus until funds got to 5%.
What kicked off this speculation that the Fed is almost finished
tightening was the release of the minutes of the Federal Open Market
Committee meeting of Nov. 1.
While most of these minutes was a boilerplate discussion of the
economy and the need to remain vigilant against the threat of
inflation, these heavily edited minutes contained a phrase
suggesting that some members of the committee were becoming worried
about raising interest rates too much.
The press and the pundits might have overlooked this phrase -- or,
at least, taken it with a grain of salt -- had it not been for
another interesting development.
On Nov. 10 the central bank issued a tersely worded statement that
it was planning to discontinue publishing its widely followed M3
money supply data. This really set the conspiracy theorists buzzing.
Aside from its importance as a gauge of Fed policy, M3 has been
expanding at an increasing pace. It's currently growing at a 7.5%
annual rate, up from 5.6% at the end of last year. On the other
hand, the growth rate of M2 money has slackened, from 5.6% last year
to only 4% today.
To some, this smacks of setting the stage for faster money growth.
I'm reminded of 1967, or thereabouts, when the government stopped
publishing statistics on defense spending, ostensibly to hide the
scope of the buildup in Vietnam.
Put these two items in the context of the yield curve, which is
almost flat, and the fact that the real (inflation-adjusted) funds
rate is now only a half-point away from its long-term average of
2.5% -- meaning that policy is rapidly approaching neutral -- and
you can see why the buzz of an early end to Fed tightening is
getting louder and louder.
But would this be a good thing?
If you're worried that a recession is nigh, you would certainly
think so, since the Fed has tended to overdo its monetary tightening
in the past.
But if you think that the battle against inflation is not over, and
are concerned that the Fed may have to monetize the skein of budget
deficits on the horizon, you might disagree.
You'd be in good company, judging by what's happening to prices of
precious metals.
Gold is pushing $500 an ounce, its highest price in 20 years, while
platinum has just equaled the record $1,000 an ounce set back in
March 1980 -- when the rate of inflation was around 15%.
--------------
Irwin Kellner is chief economist for MarketWatch. He also is the
Weller professor of economics at Hofstra University and chief
economist for North Fork Bank.
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