June 7, 2005


Greenspan says markets signalling weakness (Andrew Balls, June 7 2005, Financial Times)

Mr Greenspan, in remarks prepared for delivery via satellite to a conference in China, pointed to the "unusual behaviour" of market-determined long-term interest rates. [...]

"The economic and financial world is changing in ways that we still do not fully comprehend," Mr Greenspan said.

Some analysts have suggested the market signal meant the Federal Reserve would soon end its interest rate tightening cycle. Mr Greenspan acknowledged that "policymakers need to be able to rely more on the markets' self-adjusting prices and less on officials' uncertain forecasting capabilities".

Mr Greenspan said: "One prominent hypothesis is that the markets are signalling economic weakness. This is certainly a credible notion."

But he added that there was no fully satisfying explanation for such low long-term rates, which are a worldwide phenomenon and which have been insensitive to signs of strength in the global economy.

Foreign central bank purchases of US Treasuries was part of the explanation, but the overall impact had probably been "modest", and could not explain the drop in long-term rates over the past year around the world, he said.

Similarly, global competition and the rise of China and India had contributed to lower inflation pressures, but could not account for the fall in rates.

Previously Mr Greenspan has referred to the "conundrum" of low long-term interest rates. Some analysts suggest that privately Mr Greenspan sees rates as too low at a time when the Fed sees the US economic fundamentals as healthy and inflation risks as the greatest concern.

Mr. Greenspan will go to his grave terrified of inflation because he and his profession couldn't figure out how to stop it in the 1970s. The realities of the subsequent thirty years can't ever change that. Similarly, the senior economists of the 1960s gave us that inflation because they were fighting the joblessness of the 1930s. This phenomenon yields one important lesson: no Fed member should be over thirty.

Posted by Orrin Judd at June 7, 2005 8:51 AM

The world is too small for sustainable price increases to be pushed through on manufactured goods. As energy prices along with other 'fixed' costs (i.e., the cost of government) continue to rise while commodities remain highly volatile and in conjunction with current fed policy, the yield curve may be heading toward an inversion. Greenspan may not believe what the curve is forecasting although it's never wise to 'fight the tape'.

Posted by: Tom C., Stamford,Ct. at June 7, 2005 3:48 PM