Pulling the punchbowl
As we write, the money is even on whether the Fed's Open Market Committee will choose to push up the Fed funds rate at its meeting tomorrow, or perhaps after the election in November. With unemployment at a seven-year low of 5.1%, the Street's priests are warning that higher inflation is around the corner unless the economy makes the autumnal sacrifice of a pre-emptive rate hike.</br></br>Such thinking of course has long traditions among central bankers. Back in the 1960s, William McChesney Martin Jr. used to describe the Fed's job as that of the sourpuss who removes the punchbowl just as the party gets going. The Fed chairman himself practiced what he described: Faced with inflation of a whopping 1.5%, Martin led the Fed's board in hiking the discount rate a steep 150-basis points over 18 months during the spending build-up for Vietnam. Given that inflation is now closer than it has been in decades to the levels of Martin's tenure, it's hard to think of a good reason for tightening money except for taking away the punchbowl.</br></br>Of course, it's also currently faddish to talk of minimum unemployment levels, or to drop the unlovely acronym of NAIRU -- the "non-accelerating inflation rate of unemployment." But the notion of some kind of grand trade off between inflation and a slowdown flies in the face of the experience of recent decades. We learned, or should have, that it is possible to at once suffer both evils (the stagflation of the 1970s), or neither (the relatively low inflation, high growth 1980s).</br></br>The signs we like to look at show a picture of growth pushing forward absent inflation. The Dow Jones Spot Commodity Index, which seeks to measure the pressures in the commodities markets, stands at 146 vs. 151 a year ago. Stripped of volatile oil and food prices, most commodities measures are down from a year ago. Brian Wesbury of the Chicago bond firm Griffin, Kubik notes that the Fed funds rate is still higher than overall economic growth as measured by Gross Domestic Product, a sign that the central bank is not stimulating the economy.</br></br>The dollar is gaining against the mark, yen and the currencies of other important trading partners such as Canada. As for gold, after punching across the $400 border this spring -- the monthly average for February was $404 -- it is now bumping around at $382. The dollar is buying more gold than it was nine months back, a sign that there is scarcely a need to "wring inflation" from the greenback.