Inflation fears and waiting games

Federal Reserve: With the right signs, Alan Greenspan is ready to raise interest rates.

May 20, 1999

THE Federal Reserve's decision not to immediately raise interest rates may have temporarily calmed jittery bond and stock markets. But the recent jump in consumer prices -- the largest one-month rise in nine years -- fueled speculation that the Fed may soon raise short-term rates.

Judging from Tuesday's announcement, however, the Fed's Open Market Committee is concerned that inflation looms. It indicated it will raise rates if the nation's economy doesn't slow on its own. The central bankers believe that with a tight labor market and growing disposable income, the danger of inflation is growing. The Fed's next meeting at which rates could be raised opens June 29.

Fed Chairman Alan Greenspan has been a vigilant guardian against inflationary price increases. Even though disinflation has been the recent hallmark of this nation's eight-year recovery, Mr. Greenspan and the Open Market Committee have raised short-term interest rates whenever they thought inflation was about to rise. The chairman's deft touch on the monetary throttle has kept the recovery on track.

Lately, however, Mr. Greenspan has sent contradictory signals. He has delivered a number of speeches indicating that computer technology has led the U.S. economy into an era in which it can grow without inflation. At the same time, he has worried out loud that the country is so short of workers that inflationary wage increases may be around the corner.

Mr. Greenspan must look beyond the U.S. economy. If the Fed raises rates, the dollar will be strengthened but the recovery that seems to be starting in Asia could be cut short, with disastrous consequences for the world.

With the Fed's new policy of announcing its intentions on the day of its meetings rather than waiting eight weeks, the nation's financial markets can react more quickly to the Fed's policy directions.

In the past month, long-term interest rates have moved up on their own about half a percentage point in anticipation of the Fed raising rates some time this year. The Fed now has to decide whether this upward movement is sufficient to cool the economy without government intervention.

Pub Date: 5/20/99

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