Too good to be good

Here we are again, at the classic crossroads of the perennial paradox.

The mighty economy of the United States sent out more signals of prosperity last week, and they, apparently, could not have been less welcome.

The threat of higher interest rates hangs in the air, thanks to the word a few weeks ago that the Federal Reserve Board now has a bias toward raising them.

So when things start looking good, they start looking bad.

When the economic numbers show a robust outlook, the markets get a bit frantic because they see signs of inflation and that nagging threat that the Fed will raise rates.

Last week, for example, a top Fed official gave a speech in which he said the most recent inflation numbers - which showed a small bump in wage and price growth - could become the rule more than the exception.

Wall Street went whacky.

And when new homes sales hit the ceiling (see Keeping Track, page 12) with some of the strongest growth ever, stock brokers were seen searching for dictionaries, desperately digging for definitions of "sell" and "defenestration."

Oh woe. Cursed prosperity, begone. "Out damned spot" of success.

Just about the only piece of news that might soothe the worried breast of Wall Street would be proof of a recession (for that prospect, we suggest you turn to the David Francis column on page 17) - an event that would, true, put people out of work but would also wring out one more drop of inflation.

And, in fact, as long as the washcloth retains even a whiff of water, stock-market devotees will be watching the Fed to see whether it plans to squeeze it out.

It would do that by raising rates, which means, among other calamities, companies would have to spend more money to repay loans, which means less money left over for profits.

Lower profits mean lower stock prices.

Isn't it amazing how all these elements move so well together, as if they were a cornucopia of carefully constructed choreography?

But this is all so silly. Stocks and markets rarely move in unison unless motivated by a major, surprising event. What happens instead is fragmented, knee-jerk reactions in anticipation of major events, such as, in this case, higher interest rates.

But such anticipations have little real meaning, since those major events may never happen.

The Fed has, for at least a year, been reportedly divided between hawks and doves, those who want to raise rates and those who believe the New Economy is still new.

The latter camp sees the continued possibility of economic growth, high employment, low inflation, and low interest rates - an anathema to the hawks, who believe that inflation and recession pose the inevitable, cyclical response to growth.

Of course, the last few years of living in the USA have clipped those hawkish wings.

But these tough birds now give the appearance of having climbed back onto the perch.