Greenspan speaks out but markets ignore him


Alan Greenspan is finally worrying publicly about asset prices. After famously staying silent while the 1990s stock bubble swelled to unsustainable size, the Federal Reserve chairman seems to be responding to critics who say he should coach investors when he thinks they're not getting a good deal.

Problem is, investors aren't listening. So far Greenspan's attempts to talk down the bond and housing markets have had zero effect. Such demonstrated impotence might be even worse than if he had never opened his mouth in the first place.

Two weeks ago, Greenspan allowed as how there might be some "froth" and "a lot of local bubbles" in housing prices, although he said there is no national bubble, according to news reports.

In February, he called low long-term interest rates (another way of saying high bond prices) a "conundrum" that was hard to explain in the face of the Fed's repeated increases in short-term rates.

How have investors responded? After briefly bidding long-term rates higher, they've reversed course and at the same time show few signs of stopping the housing spree.

Yesterday, the yield on the 10-year Treasury bond, which tends to parallel mortgage rates, fell below 4 percent for the first time since Feb. 9, a week before Greenspan's "conundrum" speech.

(Bond geeks attributed much of yesterday's move to people selling euros and buying dollars after France voted down a would-be constitution for the European Union, but 10-year yields had already been falling.)

Fifteen-year mortgage rates are back in the 4.8 percent range after having passed 5.2 percent in March.

Yesterday's positive consumer confidence report from the Conference Board showed continued demand from would-be buyers, with 3.5 percent of the households surveyed last month saying they plan to buy a home within the next six months.

That's slightly down from April's 4.1 percent. But "it's not a low point or any cause for alarm," says Lynn Franco, head of the Conference Board's Consumer Research Center.

Homebuying demand as measured by the survey is at about the same level as at the beginning of the year, she said.

How could this happen?

Once Greenspan had only to cock an eyebrow to send asset prices plunging. Now markets mock him. Even eight consecutive short-term rate increases haven't made much of an impression.

(The Fed controls short-term rates, but long-term rates are driven more by supply and demand for borrowed money and lenders' perception of inflation trends.)

Here's the problem: Greenspan's long drive to make the Fed more transparent and predictable has become too successful.

Former President Richard Nixon used to say that he wanted the Soviets to think he was a bit crazy; that uncertainty and fear about what he might do would reinforce overt U.S. policy and help keep enemy forces in check.

But Greenspan isn't crazy, and we know it. In almost 20 years at the Fed he has proven he's much more like Mr. Spock than Mr. Hyde.

He announces every interest rate move the day it happens. He telegraphs policy changes months in advance. He publishes Fed minutes and transcripts, albeit after a time lapse.

He has removed all mystery from the relationship between markets and the Fed, and markets have responded as many spouses would in a similar situation: They're ignoring him.

For a year the Fed has promised to raise short-term rates at a "measured" pace and has been as good as its word, mechanically cranking up the rate a quarter percentage point at each opportunity.

Knowing Greenspan as they do, knowing he'll never opt for a nuclear option of a percent or two, asset markets conduct business as usual and fail to price in a "risk premium" to cover Fed uncertainty.

They're bolstered by the fact that another traditional wild card - inflation, which pushes up long-term interest rates when it rises - has also gotten much more predictable.

But Greenspan's recent public statements on bonds and home prices suggest the Fed is tired of being taken for granted.

One thing that hasn't changed is that the central bank is still extremely jealous of its credibility. Having failed to move markets with tiny rate rises and talk therapy, chances have risen that a piqued Fed will do something more substantial. And surprising.

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