Last year about this time, William L. Tedford Jr. predicted that, sometime around the third quarter of 2002, interest rates would start to rise in response to inflationary pressure brought about by the Fed's 50-basis point clip of interest rates on Sept. 17, 2001.
It's now the fourth quarter of 2002, and to hear most economists, Street-types and policy wonks tell it, inflation is nowhere in sight. Indeed, there has been open discussion that the Fed might lower interest rates even further.
But Mr. Tedford, who runs the fixed-income strategy for Little Rock, Ark.-based Stephens Capital Management, says he wasn't wrong, he was just off by a couple of months. And he disagrees with those who say the Fed will cut interest rates again.
"The Fed is biding its time waiting for the effect of its monetary stimulus to take hold out there," Mr. Tedford said. "This thing is getting better out there. Once we get comfortable that the stock market has seen the worst and the GDP is going upward, then the Fed will start having to slow the monetary growth rate down by raising the federal funds rate. I think that's coming sooner than most people think."
Like late in the fourth quarter of this year or early in the first quarter next year.
Mr. Tedford takes his clues from historical economic data stretching back decades. One of the things he's found is a high correlation between the 12-month rate of change of real total debt - the sum of all recognized federal, state, local government, international, private household, business and domestic financial sector debt - and the gross domestic product of the United States.
The rate of real total debt is rising, according to figures from the Fed, the U.S. Department of the Treasury and the Bureau of Economic Analysis. The 12-month rate of change for real total debt is just over 5%, according to Mr. Tedford. And his chart, which tracks the 12-month rates of change of real total debt and GDP back to 1962, does appear to indicate that GDP also should start to accelerate.
And that appears to be what's happening.
A war with Iraq probably wouldn't alter the trend much, either, Mr. Tedford said.
"When the federal government increases its deficit spending, as it is today, that has the effect of increasing total spending in the economy," he said. "The economy doesn't know the difference between you or I buying a truck and the Army buying one."