Jackson Hole

For all the yammering about rising oil and gasoline prices, one key commodity, namely lumber, has dropped 33 percent since winter. From a peak of $408 the front lumber contract has plunged to $274.

This suggests a definite cooling off of housing construction and home prices. Wall Street economist John Silvia believes that the condo markets are the front edge of this cooling. Condo inventories are rising, sale times are lengthening and prices are softening.

Private markets, city-by-city, are making their own adjustments based on affordability and the price of credit. There isn’t going to be a crash, but there will be a well-earned slowdown in the housing sector.

Other inflation-sensitive market price indicators continue to show broad-based domestic price stability. Gold prices have slipped back toward their $431 average range that has prevailed year to date. The 10-year Treasury continues to hover around its 4.25 percent range that has been in place since last October. The CRB spot commodity index has dropped slightly below its average 295 zone, in effect since last July.

In other words, outside of oil and energy, domestic prices in the aggregate look to be stabilizing in the wake of Federal Reserve money-tightening and rate-hiking moves dating back to June 30, 1994.

The yield curve is 75 basis points wide. If it would stay in this area then monetary policy would sufficiently accommodate continued economic growth albeit at a somewhat slower pace. If the Fed, however, engages in overkill by taking the Fed’s target rate to 4.25 percent, then the U.S. economy will keep slowing through next year and the year after. But the price rule indicators suggest no need for the Fed to take that kind of risk.

Domestic price stability and relatively low tax-rates are key policy indicators for continued non-inflationary prosperity. Add in the world economic boom, high domestic productivity and profits, a shrinking budget gap, and a new CAFTA free trade agreement, and you have a solidly bullish stock market and economic outlook for the next couple of years.

Fed bigwigs will be meeting in Jackson Hole, Wyoming this weekend. Will anybody be watching the price rule indicators? It would be great to see Fed chairman candidates like Glenn Hubbard, Larry Lindsey, or Martin Feldstein write an op-ed piece arguing in favor of real-time financial and commodity market prices as guides to central banking.