If you’re bearish, Greenspan is your man this week. He’s scheduled to testify to Congress on Wednesday. It’s no secret that Greenspan wants long term rates higher and the housing market lower. If you assume he’ll continue to raise short term rates to try to create the desired effect, you also have to assume at some point the yield curve could invert and signal a recession. I believe the economy isn’t strong enough to whether higher oil rates AND higher interest rates.
Despite my belief that Greenspan will continue to raise rates, I was still surprised by the bearish tone of Barron’s Current Yield article. The equity market has been acting as if it knows the Fed will stop raising rates by September. However, Barron’s chose very bearish bond commentators who believe that rates will continue to rise and that has to be considered a negative for stocks…
Greenspan is likely to focus heavily on the economy’s resilience and Fed intentions to keep raising short-term rates, says JPMorgan Asset Management senior economist Anthony Chan. "We could argue that the central bank is very disappointed that long-term rates have not risen," although Greenspan must be encouraged by the renewed climb, says Chan. "But by continuing to raise short-term rates, one can surmise that they are hoping to see long-term rates capitulate at some point and start rising to make this a truly restrictive monetary tightening cycle."
Despite the Fed’s nine interest-rate increases in the past year, totaling two and a quarter percentage points and bringing its key overnight rate to 3¼%, Greenspan has taken repeated note of the surprising decline in long-term Treasury rates. And Daniel Dektar, the chief investment officer at Smith Breeden Associates, asserts that "significant upside" in Treasury yields is still unlikely, due to the economy’s sensitivity to rates.
Overall, Andrew Tilton, an economist at Goldman Sachs, says that Greenspan is likely to maintain his "characteristically" upbeat tone, as the economy has performed well since his last congressional appearance in February. "Growth has been solid, core inflation has leveled off, and the prospect of major policy errors has been averted for the near term."
Despite good performance so far, inflation risks appear to be tilted to the upside over the medium term, he adds. "Spare capacity is dwindling, financial conditions remain very easy, and Fed officials will want to minimize the risks emerging in the housing sector." That, he says, will keep Greenspan from signaling that a pause in tightening is imminent.