LAST WEEK, the Shadow Open Market Committee, a watchdog group of mostly academics that scrutinizes the actions of the Federal Reserve, said it was concerned that rising wages and an increasing money supply would lead to inflation.
Indeed, the group recommended that the central bank raise interest rates to slow the growth in the money supply. Fed Chairman Alan Greenspan, speaking to Congress last month, said the economy's performance was "exemplary," with inflation falling despite the fact that unemployment was at a 24-year low.
We asked experts whether a bump in rates might be in order.
Chief economist, Crestar Bank, Richmond, Va.
I was really surprised when I saw that headline. This would be a precarious time for the Fed to take any action because we still don't know -- still don't have a good estimate of -- the full impact of the Asian financial crisis on the U.S. economy.
If the Asian situation affects the economy more than expected, and the Fed were to raise rates, that would only exacerbate the situation because the Fed would be tightening at the same time the crisis is striking the U.S.
We're still seeing a deceleration in inflation. The only area of concern is wages: Wages have been picking up, but if productivity gains are occurring to offset wages, we won't see wage gains contributing to inflation.
In terms of the Shadow Open Market Committee, I do sort of see their point. Clearly, labor markets are tight and wages are picking up a little.
The expectation is that the Asian situation will cause U.S. growth to slow enough that the Fed won't have to raise rates. In effect, the Asian crisis is doing the job of the Fed.
Chief economist, John Hancock Financial Services, Boston
The Shadow Open Market Committee seems to be generically hawks who are always worried about inflation. It's not a crazy position to take that there is a significant danger of inflation. It's certainly true that Alan Greenspan keeps saying we ought to take pre-emptive action.
The problem right now is that nobody is sure what the Fed is trying to pre-empt.
It may be that the economy is growing too fast and that we ought to raise rates. But we also don't know yet what's going to happen with Asia and its effect may be that the Fed's pre-emptive strike would be to loosen credit to stave off a recession.
The economy has to slow, it's growing at an unsustainable pace and can't keep going at this rate.
Unemployment keeps falling and pretty soon we're going to run out of people. That creates inflation.
Then there's Asia, whose pressure can create too much or too little of an impact.
If I had to make a bet, it would be that it will slow us down enough that the Fed will not have to make a move.
Penelope W. Menzies
Executive director, World Trade Center Institute of Maryland
What I hear around the world is that the U.S. is positioned right now in a very strong position with a strong economy. There's a feeling of respect and awe for us around the world, looking in from the outside.
I tend to go along with Greenspan [in not raising rates] only because he has been right for some time and so on target. Also, he's very well respected on the international side.
The Asian markets are a very difficult thing at the moment to put into perspective. You have very strong interest from U.S. firms looking at purchasing companies in Asia. That is a known fact.
Acquisitions from American companies are very strong and active and the U.S. is in the position right now to be making these sorts of purchases.
We are really viewed internationally as being strong , and also what I've been hearing while traveling is that business people overseas don't look at us as possibly getting hit with inflation anytime soon.
Chief economist at Allied Investment Advisors unit of the First National Bank of Maryland
Actually, the Shadow Open Market Committee seems to have lost a lot of its potency mainly because they've been crying the same tune the last couple of years. Not too many people are paying attention to them.
I do think for the past of couple years, the committee has been a nonissue.
Let me also say that they are concerned inflation is coming back because of the labor situation.
[The Sun] has four and five pages of help-wanted ads. That's the part of the [committee's stance] that still has some validity. That demand [for workers] will eventually drive up wages [causing inflation].
The other side of that point is that the labor situation could squeeze profits because the companies do not have the ability at all to raise prices.
We've had double-digit earnings growth for the S&P stocks for the past five years. The thinking is that those profit increases will slow down.
There's the possibility of no earnings growth at all in '99 and 2000.
Pub Date: 3/22/98