The Corner

Confidence Returns

The rally in gold in recent days is telling the Fed that the 50 basis point shock and awe rate cut is sufficient. Gold’s rally is putting a floor underneath the fed funds rate. I’m okay with that. The Treasury yield curve is now nicely upward-sloping. It is normalizing. That’s a good sign for future growth.  

As reported in this morning’s Wall Street Journal, credit markets have revived following the Fed move. Bond sales are resuming. Yields on corporate bonds and loans have moved lower. The commercial paper market is improving. The LIBOR rate has dropped by 35 basis points.  

Confidence is returning.  

Inflation indexes are running around 2-percent for the CPI, PPI, and imported prices. World stock markets surged on the Fed rate cut. In the US, if stocks truly believed big inflation was on its way, they’d be falling not rising. After all, the capital gains tax is not indexed for inflation.  

Right now the dollar is soft and gold is strong. This is more a liquidity warning sign than anything else. Over time, as US growth and investment picks up, there will be stronger dollar demand. Additional capital formation will soak up any liquidity excess. In other words, a growth solution.  

Meanwhile, low unemployment claims suggest something like 100,000 new jobs per month.  

The story looks just fine to me. And I’m waiting for Europe and England to lower their own interest rates.

Larry Kudlow — Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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