The market was looking like it would open up this morning. That is, until 8:30 a.m. when the wholesale inflation report came in at more than twice the rate economists had expected. Now the market is expected to drop. Will the Plunge Protection Team (PPT) step in as it may have done yesterday?
The reason the market reversed is that with higher than expected inflation, the Fed is less likely to cut interest rates. The Fed wants to keep core inflation between 1% and 2%, but when the PPI rises 1.3% in a month -- instead of the expected 0.6% -- investors fear that the Fed will need to raise rates to keep inflation within its target range. Is the Fed serious though? Last week, a productivity report noted that unit labor costs rose 6.6% in the last quarter of 2006. Although bonuses figured into the statistic, the slower growth in productivity suggests that wage inflation could be a future concern.
My guess is, though, that the Fed has a more complex goal -- it's torn between the desire to control inflation and the need to avoid sinking the economy too much. As this report from Fortune suggests, people with adjustable rate mortgages can get into trouble quickly when those rates rise. With two-thirds of economic growth coming from consumer spending, a rise in interest rates could then reduce the heavily leveraged consumer's ability to keep spending.
This leads to the PPT. Formally known as the The Working Group on Financial Markets, the PPT was created by Ronald Reagan to prevent a repeat of the 22.6% decline in the Dow on October 19, 1987. The PPT includes the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission.
After yesterday's scary looking opening, the Dow was able to close up despite a 76 point drop below 12,000 in the middle of the day. This made me wonder whether the PPT had stepped in to stop a global game of ping pong. But will the PPT be able to keep the market from falling today? Or should the market be free to blow off all its excesses in a quick collapse?
What do you think?
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
3-15-2007 @ 10:43AM
Steve said...
It certainly looks as though the PPT stepped in yesterday and probably today. Can't the goverment leave the free market system alone. Everything is manipulated. Every man woman and child knows inflation is way above the goverments figure, we see it everyday in the prices we pay. Now the goverment is surprised it went up???? They must have run out of things to take out of the formula they use to report inflation. Everytime something goes up they remove it from the mix. Let the market run. All this manipulation just protects the big guy not the average investor