(January 18) – “Who’s afraid of Alan Greenspan? Not Sy Picon,” writes Jacob Schlesinger in today’s Wall Street Journal. For all the commentary devoted these days to the Federal Reserve chairman’s campaign to cool the economy, Mr. Picon, a Northern Virginia entrepreneur, considers the central banker barely relevant to his prospects.
“Higher interest rates — the Fed’s tool for drawing capital out of the system — aren’t making money scarce for SyCoNet.com Inc., a Manassas, Va., distributor of Japanese animated videos such as Pokemon and Speed Racer. “Everybody knows the Fed’s going to raise rates in February, but as this comes closer, VCs are throwing even larger amounts of money at us,” chortles Mr. Picon, who recently received a $5 million line of credit from a Florida venture-capital fund.
“His backers, he says, “are looking for home runs, returns of 10 times, 30 times, over the next two to three years.” In that environment, even a full percentage point increase in the cost of funds wouldn’t be too menacing.
“It’s been half a year since the Fed started nudging up its main monetary benchmark, the federal funds rate target, to rein in the galloping economy. Markets are braced for another quarter-point move on Feb. 2, and anticipate two or three additional increases by midyear. Broader rates are moving, too. Yields on the 30-year Treasury bond have risen more than 1.5 percentage points in the past year. Hovering near 6.70%, they are at the highest point since mid-1997.
“An interest-rate increase can often take months to ripple through the economy, so it may be too soon to judge the effect of the Fed’s actions so far. Yet the impact to date has been practically undetectable. In December, employers around the country created 315,000 jobs, 40% more than in November, even adjusting for seasonal factors such as the usual holiday rush of business. Retailers last month reported their most brisk business since the spring of 1996, excluding the volatile sales of cars. For all of 1999, retail sales grew faster than in any year since 1984.
“Economist Rosanne Cahn of Credit Suisse First Boston Corp. recently defied conventional thinking by raising her 2000 forecasts for both how high interest rates will go and how fast gross domestic product will grow. ‘Monetary policy works primarily through convincing people that the future is going to be less rosy,’ Ms. Cahn says. ‘But that signal’s not getting through.’
“The signal certainly isn’t getting through to the stock market. Traditional market theory holds that rising rates will make interest-bearing investments more attractive, and stocks less so. But after a brief rate scare jolted stocks early this month, the Dow Jones Industrial Average has resumed its ascent, leaping 140 points Friday to close at a new record high of 11722.98. The technology-laden Nasdaq is back above 4000 and just shy of its peak. Both markets were closed Monday for the Martin Luther King Jr. holiday.
“‘Nothing short of a massive rate hike is going to start luring money away from the stock market,’ says Jack Bouroudjian, senior vice president of futures and options at a unit of Commerzbank AG in Chicago. ‘It’s very difficult to compete with interest-rate products when people see 15% to 20% returns in the stock market.’
Even housing, the sector considered most sensitive to higher rates, hasn’t been hit too hard. ‘We just had the busiest December that I’ve ever seen, and it has continued into the first two weeks of January,’ says Allan Brandt, a Denver-area luxury homebuilder. He sold five homes worth half-a-million dollars or more each last month, one-third his total for 1999.
“No one thinks the Fed has become impotent, of course. The economy likely would be growing even faster if rates weren’t rising. The increases to date have only reversed three rapid reductions implemented in late 1998 in response to the global financial crisis, and thus mark a return to earlier monetary conditions, not a long-term tightening. And those 1998 cuts are widely cited as dramatic evidence of Mr. Greenspan’s powers, since they stopped short what was turning into a worldwide panic.