The Fed Won't Be Following Fiscal Policy Over The Cliff

Rudi Dornbusch attempts to propagate the continuing myth that Fed Chairman Alan Greenspan is prepared to ease at the first sign of a budget deal ("Inflation: Don't push the panic button," Economic Viewpoint, June 21). After the negative real interest rates of the 1970s, however, the bond market won't be fooled again. Long-term rates will rise instantly at the slightest hint of "easy money," which the market inherently understands is inflationary, rendering counterproductive any stimulus on the short end of the market. Greenspan attempted to explain as much at February congressional hearings but was widely ignored by the press and senators in attendance. As fiscal policy heads toward the cliffs, we can take some comfort knowing that Greenspan's Fed is inching toward a commodity price standard and will maintain its commitment to price stability.

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