Stopping Inflation Before It Hits

February 23, 1994

To House Banking Committee chairman Henry Gonzalez, he is the "foul weather forecaster" adept mainly at wrecking a recovering economy. To Senate Banking Committee chairman-presumptive, Paul Sarbanes, he is the kind of fellow so intent on killing off inflation, that if he thought the villain was inside a farmhouse he would bomb it "when, in fact, the people in the home were an American family feeling better about the economy."

Who is this devil incarnate? None other than Alan Greenspan, chairman of the Federal Reserve, who dared to nudge up short term rates by a quarter-point on Feb. 4, thereby triggering a 96-point drop in the stock market. His many detractors seized on this development, plus a market-driven rise in long-term interest rates, to renew their assault on the nation's central bank.

Yesterday, after Mr. Greenspan stoutly warned a House committee that there may be a few more upward nudges in short-term rates before the year is out, guess what the market did? Why it went up 24 points, encouraged by the Fed chairman's upbeat assessment of the economy.

It would be too much to hope the Greenspan message would make any dent on his critics in Congress, many of whom wish to capitalize on their mismanagement of fiscal policy by putting their imprint on monetary policy. But if the financial markets respond favorably, as they did yesterday, Mr. Greenspan may prevail after all.

What the Fed chairman is doing, in effect, is to maintain near-zero real interest rates. As the economy grows 3 to 3 1/2 percent, the key Fed rate is to remain on the same wave length. It is Mr. Greenspan's contention that if he waits until inflation registers in the consumer price index, it is already too late to fight back without the kind of monetary restraints that can undercut a buoyant economy and increase unemployment. So it is his intent to anticipate inflation, now indicated by rising manufacturers' and commodity prices, and stop it with what Mr. Sarbanes calls "preemptive strikes." To the Maryland senator, this is a pejorative phrase; to us it is laudatory.

The Feb. 4 increase in short-term rates was the first after five years of continuous easing of Fed rates to help pull the economy out of recession. To those who question whether this is the time to tighten the screws, Mr. Greenspan replied that if the Fed cannot turn away from its accommodative stance when the economy is stronger than at any time in a decade, then when can it act to assure a sustained, inflation-free economy? He called it a form of "low-cost insurance."

President Clinton deserves praise for refusing to join the Fed-bashers in his Democratic Party. He said again yesterday, as he did earlier this month, that he was not alarmed about modest increases in short-term rates and advised bond marketeers pushing up long-term rates that they have no reason to do so. Why? Because Greenspan policies will keep inflation in check.

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