When it comes to interest rates, it’s the economy, stupid – not that other thing. Rates bumped up briefly on Wednesday (apparently in relief that we did not have a replay of the ’00 non-decision), but are up for real today, looking as though they will stay up and are at immediate risk to go higher.
It could be worse: damage from early-morning word of 337,000 new jobs in October was limited because many jobs were temporary, or not tied to economic acceleration. However, the economy is less likely to stall than it had seemed.
The job numbers guarantee another .25 percent hike in the Fed’s rate next Wednesday, from 1.75 percent to 2 percent. The bond market had assumed that the Fed would pause its quarter-point dripping at or near 2 percent, and that assumption is now very much in doubt; the Fed’s post-meeting statement may make painful reading.
Thus far the Fed’s hikes have merely flattened the yield curve: short-term rates have risen dutifully, but long-term ones are still where they were at the beginning. The process continued today: the 10-year T-note has risen from 4.07 percent to 4.19 percent, but the 5-year almost twice as much. If the Fed continues toward a “neutral” 3 percent-plus, at some point upward pressure on long-term rates will become irresistible.
Two things may help long-term rates for a bit. At the beginning of the Sunni re-pacification offensive (any minute, now), rates may benefit from safety-buying, but will back up quickly if combat and political reaction there and here are not too bad.
Longer-run, dollar politics with our trading partners are anything but resolved. All this year, mortgage rates have been held down by our trading partners’ bond-buying, as they try to keep their currencies and exports cheap. Not forever.
Now that other thing.
A terrible depression has fallen upon many of those opposed to President Bush, driven in part by fear that a religious or Confederate revolution has seized the nation. I suggest holding off on the rending of clothes: these are symptoms, not causes.
The most basic American divide (some might say all the way back before there was a nation) is between city dwellers and country folk. Have a look at red-blue on the county maps, not the state or electoral ones, and you’ll get the real picture.
Country people are suspicious of city dwellers, with all their new-fangled ideas, dispersed individuals without close community, and diversity of conduct and color. City types like to visit the country, but regard the inhabitants as quaint and slow. There’s a lot more non-city terrain in the West and South, and you’ll find more religion there and less windsurfing.
We haven’t had a more stark country-boy versus city-slicker match-up since Ike waxed Adlai (twice). Today’s real “battleground” is the suburban center, and neither man made a play for it. George Bush stood stock still, trusting the country would do the same in the middle of a war, and John Kerry had nothing to say except that he wouldn’t have gotten in the war in the first place.
The election did bring two surprises: big Republican majorities in both houses, and the elimination of moderates from both parties. One non-surprise: the conclusion of Nixon’s “southern strategy,” by which conservative southerners, nominal Democrats (“Dixiecrats”), would become nominal Republicans. It’s only a name-change: the voting pattern has been the same for 40 years.
The real outcome depends on President Bush’s behavior. If he spends his political capital on inclusion, as he may show in new cabinet appointments, we’ll make some progress. If there are more loyal hacks, like the current Treasury Secretary, in over his head as dollar manager, then we won’t.
Some people are worried about Bush’s nominees to the Supreme Court. As for me…next year, Bush will nominate a replacement for Federal Reserve Chairman Alan Greenspan.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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