Former Federal Reserve Board Governor Wayne Angell has consistently argued for a worse than expected U.S. housing slump accompanied by larger than expected price declines. Well, today's record drop in existing home sales with a bulging 10-½ month ratio of unwanted homes on the shelf, and a 4 percent median price drop in September confirm Wayne's view.
While chief economist over at Bear Stearns, Wayne had a good interest rate forecasting track record. So it's important to note that he's calling for a 3 ½ percent to 4 percent fed funds rate, down from its present 4-¾ level.
The Fed will announce its next policy directive on October 31st, a week from today. Bond markets have fully discounted a 25 basis point cut in their target rate. I'm wondering if they shouldn't do another 50 bps, a second shock and awe action?
This would be a pro-growth economic signal for a 2008 rebound that might conceivably boost the dollar. It would also help fragile credit markets. Bears will argue against rate cuts because they worry about inflation. But it's hard to find any continuous inflationary evidence.
Oil, gold, and other commodity price increases seem to be part of the global boom story, not the inflation story. In the inflationary 1970s, rising commodities were associated with falling stocks. In the 2000s, rising commodities are now associated with rising stocks.
It could be that investors want the U.S. to get its rate cuts out of the way, quickly, in order to better share in the global boom. Any excess liquidity would be absorbed by rising investment.
Meanwhile, House Taxman Charlie Rangel's plan is scheduled to be released tomorrow (I will interview him on Kudlow & Company). It looks like it will raise personal taxes while reducing corporate tax rates. It's too bad that Chairman Rangel didn't opt for a big bang Reagan/Rostenkowski 1986 tax reform moment. The best approach would have been to cut all tax rates and broaden the tax base by getting rid of all the special interest flotsam and jetsam and corporate welfare subsidies. That approach would boost the dollar and growth.
Ultimately, I think Mr. Rangel's hands are tied by a Democratic House Caucus bent on class-warfare. I still think the "inner Rangel" has a lot of supply-side blood in him. Whatever the case, very little of his tax package is likely to make it into law.