Alan Greenspan was the Federal Reserve Chairman from 1987 to 2006. Chairman Greenspan served under four Presidents, Reagan, Bush I, Clinton and Bush II. The Fed chief created and mastered the art of “Fed Speak,” intentionally wordy, vague and ambiguous language and statements — deliberately unclear about monetary policy. The Chairman intended to reduce anticipatory actions by the market or investment public to prevent markets from overreacting to his remarks.
Chairman Greenspan’s actions and words showed that he wanted the markets to remain in the dark and wonder if the central bank would increase, lower or leave rates unchanged at each FOMC meeting. Consensus uncertainty about the path of the Fed Funds Rate was nirvana for the chief who sat at the head of the table at the central bank for nearly two decades.
The current Fed Chairman, Jerome Powell, may have achieved Greenspan nirvana after hiking rates by 5.375% since March 2022. The markets are confused about the central bank’s next move as the members head to Jackson Hole, Wyoming, for their annual gathering.
Rates have moved aggressively higher
- The Fed Funds Rate rose from zero to 5.375% from March 2022 through July 2023.
- Quantitative tightening pushed rates higher along the yield curve.
- The Fed’s tone remains hawkish.
Inflation has been trending lower
- Inflation rose to the highest level in decades as dovish central bank accommodation and government stimulus planted inflationary seeds.
- Consumer and producer price data has been trending lower over the past months.
- The Fed’s inflation target is 2%.
- The economic condition remains more than double the target level.
The U.S. economy remains robust
- Employment and wage data have been strong.
- Retail sales and other economic indicators remain robust.
- The Atlanta Fed lifted its U.S. third-quarter GDP growth forecast to 5.8%.
The case for higher rates
- Core inflation at over 4% supports more rate hikes.
- The Fed’s commitment to its inflation target suggests more than 25 basis point increases over the coming months.
- Economic data does not preclude higher rates above the 6% level for the Fed Funds Rate.
The case for a pause or lowering rates
- Monetary policy tightening has a lagged impact on economic data.
- Inflation is trending lower, and the trend is always your best friend.
- Consumers feel the pinch from rising mortgage and loan rates, eventually impacting spending.
- Funding costs for the U.S. national debt rise with each rate hike. At 5.375%, it now costs over $1.7 trillion annually to service the $32 trillion debt.
Greenspan nirvana in August 2023
- Economists, forecasters, and pundits have varied opinions on the path of least resistance of monetary policy for 2023 and 2024.
- The markets’ sentiment reflects uncertainty about the path of interest rates.
- Alan Greenspan could sleep peacefully as the Fed has reached his definition of monetary policy nirvana.