Clinton/Lott Government VIII/Fedwatch
Jude Wanniski
March 21, 1997


LOTT: We had been counting on Senate Majority Leader Trent Lott to keep the Republican Party on track this year, and he seemed to be doing fine through the month of February -- notwithstanding his predictable defeat on the Balanced Budget Amendment. Our bet that Lott would maintain control of the party, and have a working relationship with the White House, was the basis for our belief that there would be a capital gains tax cut by July. All of a sudden, he has allowed the budget process to get away from him, which points to no capgains cut this year unless there is a successful rescue. It was this breakdown that undermined the smaller cap stocks on Wall Street in general, the junior high-tech stocks in particular. How did it happen? House Speaker Newt Gingrich is getting all the blame, but Lott should have seen it coming and headed it off at the pass. It has been conventional wisdom that Lott would be the GOP strategist and spokesman in the 105th Congress, as long as Newt remains crippled by his problems in the 104th Congress. One of the problems is that Lott, like Bob Dole before him, not only defers to Chairman Pete Domenici on tax/budget issues, but he also has nobody on his staff who is capable of strategic thinking in this realm. His top aide in this area is a leftover from the Dole staff, a man who has no connections to any of the technical talent available.

GINGRICH: In his excellent Wall Street Journal column today, Paul Gigot tells us that Newt broke away on his own in announcing that tax cuts would be delayed until after the “moral imperative” of a balanced budget is in hand. Gigot says Newt was trying to outfox the Democrats: “But it is hard to outfox anyone, even liberals, when you blurt out your tactical retreat in public, in advance. It’s even harder when you don’t bother to tell your own deputy, Dick Armey, or the Senate GOP leader, Trent Lott, what you’re up to. And it’s harder still when your foxiness is rooted in timidity and weakness.” Newt’s blunder this time may spell his demise. Democratic and Republican staffers on Capitol Hill assume that it is only a matter of time before Newt resigns from Congress -- and there is a “ghoul pool” of several thousand dollars that goes to the person who picks the date he quits. The $300,000 ethics committee fine hanging over his head is the biggest palpable problem he has, but the Republican Party and the country cannot afford a Speaker who is so disoriented that he is capable of making the kinds of major mistakes he made this week. I wouldn’t be surprised if Gingrich resigned within the month.

ARMEY: The House Majority Leader Dick Armey is the most likely candidate to succeed Gingrich, if it comes to that. If so, he himself has to break out of the defensive crouch he has gotten himself into on taxes. A week ago, House Majority Whip Tom DeLay got the defeatist ball rolling with a trial balloon suggesting tax cuts be put off until the budget is balanced. He thinks there are not enough votes to pass tax cuts first. If the leadership got the GOP conference together and said it was a party issue to put tax cuts ahead of a balanced budget, there would be plenty of votes, Democrats included. The plan is to pass a budget resolution that includes tax cuts, but to then pass a budget reconciliation without tax cuts, to avoid being criticized by Democrats for paying for Medicare cuts with tax cuts for the rich. By the time they get to the tax cuts, though, all the sweet and easy offsets will have been used up, including the rosier economic projections. Jack Kemp, who is finally getting some attention for the broadsides he has been firing against his old pals Gingrich and Lott from Empower America, correctly points out that if the tax cuts preceded budget reconciliation, the Congressional Budget Office would be able to increase economic assumptions again -- providing further easy offsets down the line. Kemp will be on ABC’s "This Week" on Sunday, explaining the strategy. I’ll be on Fox Cable News’ “Cavuto on Business,” Saturday at 6 p.m., repeated Sunday at noon.

Jude Wanniski

FEDWATCH:  In his testimony yesterday before the Joint Economic Committee, Fed Chairman Alan Greenspan practically promised to raise rates next Tuesday, which is the way it was played by the media. It is hard for us to believe the man has drifted so far from his long-held policy anchors, none of which are signaling a need for a pre-emptive strike against inflation. But in order to justify a rate hike the Wall Street bears have been pleading for, Greenspan now finds himself in a flirtation with nonsensical ephemera like “job insecurity” and worker “quit rates.” The risks of future policy errors will rise substantially if Greenspan actually accepts these half-baked and ill-defined indicators as providing monetary information superior to the sensitive auction market signals provided by gold and foreign exchange prices. There still is a chance, one in five we guess, that there will be no hike. Greenspan’s testimony left a bit of room open for the other 11 voting members of the FOMC. Dow Jones and Reuters reports heavily stressed those parts of his testimony that pointed toward tightening, as he noted the positive economic results of maintaining low inflation and inflation expectations: “These types of results are why we stressed in our monetary policy testimony the importance of acting promptly -- ideally preemptively -- to keep inflation low over the intermediate term and to promote price stability over time.” This one sentence was enough to persuade former Fed Gov. Wayne Angell, who attended the hearing, that the Fed will raise rates by a quarter point.

In all of this, it is nearly impossible to identify the factors in the outlook that Greenspan apparently thinks he should act on, beyond some vague intuition that things have been good for so long that they can only get worse. He acknowledged yesterday that there is no evidence in commodity or foreign exchange prices to indicate the danger of “mushrooming” inflation pressures. Yet he emphasized that the Fed has erred in the past by acting “too late” to stem incipient inflation. But his by-now tiresome expressions of concern about potential worker demands for higher wages potentially fueling inflation is pure Phillips curve twaddle. The only reason his sophomoric observations about higher wages causing inflation were not torn to pieces by the JEC members is that not one member, from either party, seems to know any different. In his almost 10 years as chairman, we’ve never before heard him voice the opinion that higher pay, that has not been preceded by a rapidly rising price level can itself be inflationary. Against a backdrop of price stability, especially in the price of gold, wage gains can only flow from productivity improvements. We would never have thought it possible we would hear him argue against the basic market mechanisms that produce rising living standards, but here he is.

The initial response to Greenspan’s remarks suggested that perhaps long-term bond holders were breathing a sigh of relief, having already discounted for a 25 basis point hike and are satisfied that at least the speculation over when the Fed will move will be brought to an end. The yield curve flattening customarily seen in response to expectations of Fed tightening narrowed the 30-year/ two-year spread from 80 to 72 basis points, as portfolios shift on the margin out of shorter-dated assets. But at least part of yesterday’s long bond improvement could be traced to the dollar’s brief pop on foreign exchange markets -- the predictable knee-jerk reaction to an anticipated rate increase. Now, yesterday’s foreign exchange gains have all been given up, as global portfolios make a more careful assessment of the risks in dollar-based assets with a central bank preoccupied with chasing wage phantoms.  

David Gitlitz