Who should Fed Chairman Alan Greenspan listen to: Wayne D. Angell or John F. Welch Jr.? Former Federal Reserve Governor Angell is telling Greenspan to hike short-term rates by 50 basis points when the Fed meets in July. The economy is growing too fast, real wages are going up too much, and inflation is around the corner, argues Angell. General Electric Co. CEO Welch is telling Greenspan to cool it. Companies have no pricing power, and productivity is up, so the recent pop in wages is not inflationary, he argues. Welch is right. Take the summer off and play a lot of tennis, Alan.

Angell is not alone in worrying about inflation. A recent report showed that 348,000 jobs were created in May, twice the number expected. Second-quarter growth in gross domestic product may be running at 3 1/2% to 4%. Bond vigilantes are in a frenzy. They have bid long-term rates up over 7%.

Yet the numbers show no sign of higher inflation. Kellogg Co. is cutting cereal prices, and Nissan Motor Co. is cutting auto prices. Chip prices are sinking, as is the cost of gasoline. The core rate of the producer price index was flat in May, and the core rate of the consumer price index rose only 0.2%. Gold is down, the dollar is up, and copper has cratered.

Why so little inflation in the face of fast economic growth? Mutual funds are expanding at a record $25 billion monthly, pouring capital into initial public offerings and expanding investment by corporations. As a result, the economy's manufacturing capacity is increasing at a 4.5% annual rate--twice that of the early 1990s. Rising capacity means the economy can run hotter without igniting inflation. Service economy data is less clear, but there is enough anecdotal evidence to show that unit labor costs are stable. This implies that productivity is rising throughout the economy.

We're hoping Alan Greenspan goes with Welch's advice and persuades other Fed board members at the July meeting to let capitalism do its thing. Rates shouldn't be raised to kill off economic growth that shows few signs of generating inflation.

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