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How the Bond Markets React How can you explain it without using love struck metaphors left over from Valentine's day. The bond market breathed a sigh of relief last week, very much the sound of a lover receiving just the right card saying just the right thing from just the right suitor. Alan Greenspan, chairman of the Federal Reserve visited Capitol Hill in his annual (more by tradition than mandate) update on the economic doings as his committee view them. Elected people as well as a handful of other knowledgeable commoners understands that the Fed looks at the economy in a somewhat different way. This is because they have different numbers that we are not privy to and therefore, we are not as well informed.
So we play guessing games before the chairman begins his testimony. We hope that he is asked the right question, the one that lacks the political grandstanding so often the scene stealer in these meetings. The chairman, looking scholarly and pretending to be interested, does an admirable job at remaining apolitical and this year was no different.
But the words he uses in his remarks and the elusiveness of his answers are what moves markets. This time was no different. Using the word patient, something bond investors have by the bucket load but have recently lost a grip on, was all that the fixed income markets needed to give us hope that the bull was still alive and well. For now.
With no real reason to raise rates in the near future, Mr. Greenspan suggested that the relaxed monetary policy currently employed by the central bank to keep the wheel's greased is working fine for the time being. The Fed seems to like the low inflation rate even if it is accompanied by a disinterested job market. If the job market should suddenly grow robust, an event that seems less likely as time goes on, then Mr. Greenspan might look to a tightening. But he realizes, probably better than most, that this is not going to be an easy transition once it begins.
The job front has become worrisome as it becomes more of an issue. The unemployment rate may be dropping, but as Paul Krugman, columnist for the New York Times points out, the number of people entering the job force every day has increased significantly. These people are not able to find work and are unable to receive benefits. No bennies, no head count for the rate. Krugman estimates that the working age population has grown 2.4%.
But verbiage about a growing economy with increases as high as 5% in 2004 with a steadily dropping unemployment rate to as, the chairman suggested, 5.25% was met with much fixed income jubilation.
Now the fed chairman never really said anything different in comparison to his end of January remarks at the F.O.M.C. meeting. "Patient" is still not "steady for a considerable time" but Treasury prices shot up anyway. Bond investors are a wary bunch by nature and refuse to believe that this policy will last much longer than the first half of the year.
Bond investors both domestic and foreign thought the news was worth buying and did so, encouraging the debt markets to think that things are not as dire as imagined. The dollar however, tumbled, an unfortunate side-effect of the monetary policy and the remarks made by the chairman that there is really nothing to worry about when it comes to the dollar's value. The fall, Greenspan believes is nothing to worry about because it is happening at an acceptable pace.
Several weeks down the road, the unemployment report for February will be released. If those numbers go up, all of this celebratory buying will unravel as fast as it did at the end of January, patient or not.
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