At last you’ve done it, Mr. Greenspan.
Now the rest of us will keep our fingers crossed that “it” was the right thing to do.
On Friday the Federal Reserve raised the federal funds rate, the rate banks charge each other on overnight loans. The Fed moved its target for the rate up 0.25 percentage point, to 3.25 percent, the first time in five years that it has raised interest rates.
That should be plenty, Mr. Greenspan: enough to remind everyone you’re still at the monetary controls, protecting us from inflation; not enough to throw the economy into a tailspin if it turns out you guessed wrong.
And you may be wrong, Mr. Chairman. You may have overestimated the threat of inflation, sort of like the way you underestimated the severity of the recession that cost George Bush his job.
Back then you lowered rates in small steps, a strategy that turned out to be too little, too late. The damage was done, and 15 million were out of work by the time you ratcheted the cost of money down to that bargain rate of 3 percent.
Better luck this time, Mr. Greenspan.
It took longer than you expected, but low interest rates finally appear to be working. The recovery is gathering steam, with the latest report showing economic output for the last quarter of 1993 growing at a giddy annual rate of 5.9 percent.
Conventional wisdom has it that such growth will trigger inflation, what with recovering companies bidding up the price of labor and material. Raise the cost of money, the wisdom goes, and companies won’t bid so aggressively.
For several weeks the financial markets had been twitching in anticipation, like squeamish patients in a dentist’s chair.
The big investment houses issued special alerts with titles such as “Fed Watch,” while the stock and bond markets were doing a “will-he-or-won’t-he” dance.
Financial markets don’t like uncertainty, as you know, so it’s good that you’re getting on with it. I’m worried, though, that you didn’t specify Friday how much higher rates will go.
Beware those gung-ho inflation fighters who claim a 0.25 point increase isn’t enough … that the brake needs to be pushed firmly, not just feathered. They’re the same voices who cautioned you to lower rates slowly in 1991-92.
Remember, you can always raise rates again if it turns out that a quarter-percent squeeze isn’t enough. But more importantly, you don’t want to point all your guns at inflation when it’s still possible that this recovery may dissolve faster than you can say “George Bush.”
By all accounts, Mr. Greenspan, you are a voracious consumer of economic data, a man who follows rail-car loadings the way Bulls fans watch the NBA standings.
So before you provide details on how hard you’re hitting the brake, consider these details:
– Though unemployment has fallen to 6.7 percent from its 7.7 percent peak in 1992, a large number of the new jobs are temporary or minimum-wage positions. Corporate America still is shedding well-paying positions at a rate of 100,000 a month.
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– The threat of inflation is more imagined than real, with the consumer price index climbing at only a 3 percent annual rate and the producer price index at just 1 percent.
– On Monday President Clinton will propose a fiscal 1995 federal budget so austere that his liberal friends may wonder out loud whose side this president is on. Fiscal drag on the economy surely will result if funding is slashed from about 300 federal programs, ranging from NASA to public housing.
– On April 15 thousands of America’s wealthiest families will discover-if they didn’t know it already-that their spendable and/or investable incomes have been cut substantially, and retroactively, by last year’s Clinton-sponsored tax increase. More fiscal drag.
– The stock market had shown signs of running out of gas just shy of the 4000 level on the Dow Jones industrial average even before Friday’s sell-off. By traditional measures, especially price/earnings measures, stocks still are overpriced. The market’s lofty status would seem to be dependent on the continued unattractiveness to investors of low bank interest rates and on an expectation that corporate earnings eventually will justify those high stock prices. Friday’s 96-point drop in the Dow shows you may already have spooked the market.
No doubt you considered all this before making your educated guess, Mr. Greenspan.
Hope you guessed right this time.