Midyear Jude Wanniski and David Gitlitz July 1, 1999

FED RATE HIKE: Certainly, it could have been worse. With Treasuries already priced for another 50 basis points in funds rate hikes before year-end, the relatively non-threatening tone of the FOMC announcement and restoration of a "neutral" bias at least allowed the market to back away from its worst-case assumptions. This was most evident at the short end of the yield curve, where the new two-year note rallied from 5.75% to 5.51%, essentially taking one tightening off the yield. By early this morning, though, second thoughts about this optimistic early interpretation were apparent, with the two-year giving back half of yesterday's late gains and the long bond reversing most of its point-plus pickup, the yield back above 6%. The Fed offered little real solace that this 25 basis point hike to 5% would be an isolated action. The announcement was vague enough to support any number of interpretations, but it certainly does not rule out the possibility of the Fed doing the same thing again for all the wrong reasons come August or October. While the FOMC said it chose to drop its "predilection" about further near-term action, "in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth." This formulation is an invitation to sustained credit market volatility for the next few months, as each new piece of backward-looking economic data is scoured for what it supposedly will mean to the supposedly forward-looking Alan Greenspan. Indeed, this morning's long-bond sell-off was sparked by release of June's stronger-than-expected NAPM survey. (DG)

TAX AND BUDGET: The embarrassment of riches flowing from the official budget estimates points in the direction of tax cuts sometime this year. The President and the Democrats seem to be signaling they would be prepared to do deals for part of the projected surplus funds. House Ways&Means Chairman Bill Archer continues to play his cards close to the vest on what he plans to push through his committee and the House, but the assumption is his package will be unlikely to win sufficient bipartisan support to survive a presidential veto. With Senate Majority Leader Trent Lott getting behind the bipartisan Coverdell-Torricelli bill that we have been telling you about all year, it is being seen as the most likely to succeed in a second round after one veto. Rep. Lindsey Graham [R-SC], who has sponsored the companion bill in the House with Rep. Bill Jefferson [D-LA] and Rep. Bob Wexler [D-FL], is trying to persuade House Majority Whip Tom De Lay [R-TX] to back it. If De Lay, the most partisan Republican joins in, we could count on it becoming law, I think, because that would get Vice President Al Gore involved on its behalf. The biggest stumbling block to a tax cut that would be good for the economy is the Dark Side of the GOP, which would prefer the economy to be weak in 2000 to hurt Gore's chances of succeeding Clinton. If Gore or Bill Bradley embrace Coverdell-Torricelli, the Dark Side of the GOP is checked, and so are the liberals who want no tax cut for anyone so all surplus funds can be spent on social programs. (JW)

Y2K: Check our website www.polyconomics.com today for helpful hints on how to personally prepare for Y2K, courtesy of the American Red Cross. With half the year gone, the Y2K countdown officially begins. Have a Happy Independence Day! (JW & Co.)