Greenspan's goal: pre-empting inflation

Interest rates: Fed chairman prepares markets for modest tightening to avert future price rises.

June 21, 1999

MUCH to the displeasure of some, the country's most influential economist told Congress last week to prepare for a small rise in interest rates in the near future.

Federal Reserve Chairman Alan Greenspan is worried about inflation. Not now, but six months or a year from today. To avert rising prices, Mr. Greenspan indicated "early pre-emptive actions" by the Fed may be imminent.

At the moment, the economy is continuing its unprecedented peacetime advance. Mr. Greenspan called it a "stellar, noninflationary economic expansion." Consumer prices are flat, unemployment is at a 29-year low, productivity gains are far above historic norms and wages are firmly under control.

Yet the Fed chairman, and many other governors on the Federal Reserve Board, are concerned. They want to remain ahead of the curve.

Right now, their worry is that a shrinking supply of available workers could soon force employers to offer higher wages to fill vacancies. That, in turn, could lead businesses to offset that expense by raising prices to consumers -- just what Mr. Greenspan seeks to avoid.

He indicated a desire to slow the nation's strong economic growth rate from 4 percent annually to a more sustainable 3 percent.

To do that, most -- but not all -- financial analysts expect the Federal Reserve to tighten the money supply a tad, by increasing the "fed-funds rate" on overnight loans banks make to each other by 0.25 percent.

In recent speeches, Mr. Greenspan has been less opaque than usual. He still praises revolutionary advances in computers and telecommunications that have led to unexpected productivity gains. He warns, though, against thinking technology can produce uninterrupted prosperity.

The Fed chairman seems focused on keeping inflation at bay by acting before, not after, prices start to soar -- a pragmatic and cautious way to proceed. If his actions in the next few months help sustain economic expansion over the long term, the Fed chairman once again will look like the best crystal-ball reader in Washington.

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