Re: Release of August FOMC minutes - Paul was right (!)

[Doug Henwood <dhenwood@xxxxxxxxx>]

On Sat, 1 Oct 1994, James K. Galbraith wrote:

> I invite all members of pkt and other readers to contribute to a contest
> with the following rules:  (1) provide one coherent economic reason, based
> on either theory or evidence, for prefering a half-point rise in interest
> rates every twelve weeks to a quarter point every six weeks; and (2) Given
> the public reasons offered by the Federal Reserve since February for raising
> interest rates, and carefully adhering to the logic of Chairman Greenspan's
> various testimonies about those reasons, describe one set of economic
> conditions consistent with those reasons under which the present Federal
> Reserve would (a) agree to stabilize interest rates or (b) vote to reduce
> interest rates.

Here's my $0.02:

(1) Wall Street prefers a real manly gesture to a girly-man's, and is
willing to wait for the real thing.

(2) (a) Growth settles into a sustained 2.5% +/- 0.25% range.
    (b) Growth falls below 1.0-1.5%, or the Dow falls below 2500.

On (2)(a), in its latest World Economic Outlook (not yet published, but
released to the Financial Times), the IMF has urged the US to hike rates
enough to slow growth to 2.5%. The WEO points out that US real short
rates are now 1.5% and long rates 4.25% (or were at the time the draft
was written), and contrasts this with implied disfavor with 1985-90
averages of 4.5% and 6% respectively. It also urges the US to cut its
budget deficit further (it's already the lowest in the G-7) and get the
debt/GDP ratio on a downward trend.

The Fund forecasts a rise in 3-month US$ rates to 5.5% from the 1994 avg
of 4.4%. It sees a rise in yen rates and a slight dip in D-mark rates.

Doug

Doug Henwood [dhenwood@xxxxxxxxx]
Left Business Observer
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212-874-3137 (fax)