FSC and the Fed
Jude Wanniski
May 6, 2004


The news on the employment front has been too good lately, especially when coupled with the widespread feeling the Fed now is poised to begin a series of quarter-point hikes in the funds rate. As expected, the gold price is again below $390, with new jobless claims surprisingly low today. If the job creation number comes out big tomorrow morning, we can expect another dip in gold, with the futures market expecting a Fed funds hike in June instead of August. Remember that in our "best-case scenario," the good news on the employment front would be interspersed with so-so news, which allows time for the incipient deflation to offset the news dribbling in from the old inflation (which ended in February with gold at $430).

Now we have to watch the corporate tax bill, which is the offset to the Foreign Sales Corporation (FSC) that we have been awaiting for several months. It now is possible again that it will break out of the gridlock, with reports at midday that Senate Majority Leader Bill Frist told Minority Leader Tom Daschle that he expects to finish up on the bill by this evening. Finance Chairman Chuck Grassley said earlier that he expected the Senate to clear the bill by tomorrow, or no later than Tuesday. Once we see the shape of it, House Ways and Means Chairman Bill Thomas also will see its shape, which will enable him to accommodate it in a way that pulls together a majority vote for an optimum bill for Bush`s signature.

The net effect of a good bill that clears Congress before the Memorial Day break will be another boost for the real economy, including an increase in the demand for dollar liquidity. That will pull the gold price down again, which in turn should tug at the oil price, now at $40/bbl. At some point, if all is to go well, someone in a position of authority has to start noting the gold price as a key inflation signal, or we will have the Fed raising the funds rate on top of new liquidity demands. Of course, that would be bad for the real economy and the stock market. Who might that be? Fed Chairman Alan Greenspan would be my first choice, but Treasury Secretary John Snow would not be bad either. Someone high up to break the ice, in order to shift the Fed`s target from employment to commodities.

If you did not notice, yesterday’s New York Times ran an editorial yelling at Greenspan for not raising the funds rate right now! Inflation is upon us! Certainly, the Times is unhappy with all the good news coming in on the employment front, which hurts their candidate for President, Senator Kerry. It does not so, but it wants to be able to blame the Fed for keeping the bubble going to help the White House, just in case this is all an issue come November. It was helpful that the Fed now indicates its rate increases (or increase) will be "measured," as this leaves room for one quarter-point move before the election and none afterward. We continue to disagree with other supply-siders who say the Fed funds rate has to go to 3% eventually.

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