Global Agenda: Playing for time

For Wall Street and the world financial community in general, the war in Lebanon is a distant background rumble. They are, of course, worried about the price of oil, but this week brought evidence that rotting oil pipes in Alaska has far more impact on the price of crude than the fighting in South Lebanon and the posturing of Iran and the US over a possible diplomatic solution. The focus of attention among those financial types still stuck in the office in mid-August is resolutely on the twin bogies of inflation and recession - and how the Fed and other central banks assess the relative balance between these threats. Whether this assessment of the relative importance of macroeconomic factors versus geo-political factors is correct or not is open to debate. Israelis who would tend to give prominence to political, military and ideological issues might like to rehearse explanations for the extraordinary phenomenon of the shekel strengthening as the war proceeds and the resolute determination of the Israeli investing public to de-link the fighting from the markets as far as possible. On the other hand, the extraordinary response of authorities and airlines on both sides of the Atlantic to the revelation of a plot to blow up British planes in mid-air, should encourage economic analysts to give some thought to the growing impact of geo-political developments on their models of economic behavior. But, if past performance is anything to go by, the analysts will stick with what they know and love - above all, the nexus of inflation, monetary policy and interest rates. At the end of the day, they are more right than wrong in this approach, because what is certain is that every month there will be new data on inflation - there are consumer and producer price indices, with and without energy, housing and other components, etc., etc. - which will be the basis for decisions taken by central banks at meetings planned long in advance. The dates of all the meetings of the Federal Reserve, European Central Bank, Bank of Japan, Bank of England etc., during 2007 have been fixed and published. Analysts fix their whole working life (and vacations) around these critical convocations, the same way as football fans plan their lives around next season's fixtures of their club. Indeed, the parallel goes further. In both cases, the possible outcomes of the "fixtures" seem to admit only three possibilities - raise, lower or leave interest rates unchanged at the central banks, and win, lose or draw the game. But this is absurdly simplistic. In reality, several other factors must always be taken into account, the most important of which are a) how was the specific result arrived at? You can scrape a win or run away with the game, and you can conduct a long and agonized debate culminating in a decision determined by a very close vote - or a brief review of the data and a unanimous vote in favor of a given course of action or b) What are others doing? What you do is not taking place in a vacuum, but rather is part of an ongoing interactive process in which every team/central bank influences, to a greater or lesser extent, how the others think and act. Finally, and most importantly, there is the seemingly obvious issue of what your aim is. Just as the aim of a team in a specific game may not necessarily be to win but perhaps to draw or even to lose by the smallest possible margin, so the aim of a central bank in a specific meeting/decision may be tactical. The Federal Reserve meeting held this week was precisely of this nature, in that it "paused" in the ongoing policy of raising rates in the hope of having a clearer assessment of the state of the economy, and hence of what it should be doing, by the time it next meets on September 20. Remarkably, most analysts not only thought that was what would happen, but they felt it was the right way to proceed at this juncture. On the one hand, inflationary pressures are clearly rising in the US and elsewhere. On the other, economic growth is clearly fading - which should help moderate those inflationary pressures, so best to wait and see. If that doesn't happen, the nightmare scenario of stagflation - rising inflation and falling growth - may be realized. But it would certainly be preferable not to have to think about that until next month and, in the meantime, let investors and traders enjoy their vacations.