Interest Rates and the Economy

August 11, 1994

While Washington and Wall Street are watching Alan Greenspan's every move in the here and now, the Federal Reserve chairman professes to have his eyes glued on what happens next year. "We have no alternative but to be forward-looking and to recognize that the policies we are making today are really relevant to 1995," he told Congress yesterday. "Monetary policy which fails to focus on the long-term requirement of achieving price stability is inevitably going to find itself in a position where inflation emerges, instability follows in its path and a significant negative impact on long-term unemployment is the result."

Ponder those Delphic words. They won't tell you whether the Fed will raise short-term interests for the fifth time this year when its top governors assemble Aug. 16. But they demonstrate once again that Mr. Greenspan is determined not to let inflation dTC happen on his watch, even if that requires unpopular moves toward austerity.

While the weight of speculation is on the side of a x quarter-percent hike next week, economic data are so mixed that the outlook is uncertain. The inflation rate continues to hover at an annual rate of 2.7 percent, a modest level even in Mr. Greenspan's world. But as the Fed chairman reminded Congress, he worries what the inflation rate will be a year hence. And many economists anticipate the inflation rate will climb to 3.2 percent in 1995. That's close to a 3.4 rate that is considered an unacceptable upper limit.

Marylanders know how their senior senator, Paul S. Sarbanes, feels about this prospect. He has opposed Mr. Greenspan's four earlier increases and is against another. But what does the Clinton administration think? Yesterday, with Senator Sarbanes on the platform, presidential trade representative Mickey Kantor told a Port of Baltimore breakfast that current interest rates are "relatively low" and an important factor in creating 4 million jobs and reducing the size of annual deficits.

What concerns the White House is not so much the state of the economy, which both Mr. Clinton and Mr. Greenspan extol lavishly, but the president's failure to get credit for this. A Washington Post-ABC News Poll gives Mr. Clinton a job approval rating of only 47 percent -- a drop of 10 percentage points in only four months. This can't be due to inflation, or unemployment, or economic growth. Rather, it has to do with Mr. Clinton's personal troubles, his uncertain management of foreign affairs and a focus on health care reform that deflects attention from the economy, which should be Mr. Clinton's strong point.

Citizens need not worry very much if the Fed hikes interest rates a notch next week. The stock and bond markets will gyrate, to be sure, but Wall Street is not Main Street. Its increasingly perverse behavior does not reflect the real health of the economy but quite the reverse. Mr. Greenspan's monetary policies have worked well so far, and are entitled to continuing trust.

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