The Fed's modest move

July 05, 1999

The New York Times said in an editorial Thursday:

William McChesney Martin Jr., the chairman of the Federal Reserve Board during the great economic expansion of the 1950s and 1960s, once said that the role of the Fed was "to take away the punch bowl just when the party gets going."

Alan Greenspan, the current Fed chairman, on Wednesday served notice that he does not want to spoil the fun. While the Fed did raise an important interest rate by a quarter of a percentage point, as had been widely expected, it also said its policy was now neutral, rather than biased in favor of a further increase.

Wall Street celebrated by sending the Dow Jones Industrial Average up 200 points in the first 15 minutes after the Fed announcement. Mr. Greenspan and his colleagues seem to be betting that the economy will cool down without much action by the central bank.

The Fed has been expecting the American economy to slow for the past three years, but the willingness of consumers to spend rather than save has kept the economy roaring ahead.

Now, with the manufacturing sector strengthening as overseas economies rebound, signs of inflation have appeared, as Mr. Greenspan noted in testimony before the Joint Economic Committee two weeks ago.

Even with rates rising, however, consumer confidence has climbed to a 30-year high. That suggests that neither the economy nor consumer spending is likely to slow soon.

If the American economy continues to grow at the recent rate of above 4 percent, there are substantial risks that inflation will accelerate and that, with the record trade deficit continuing to expand, the dollar will eventually come under heavy pressure.

Those risks will be intensified if the White House and Congress choose to ease fiscal policy now, either through large new spending programs or by a big tax decrease. Should that happen, Greenspan may have no choice but to push interest rates up again later this year.

Pub Date: 7/05/99

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