The Right Call At Greenspan's Fed

Don't misinterpret Federal Reserve Chairman Alan Greenspan. He's not turning soft on inflation. On the contrary. Greenspan's decision at the recent Federal Open Market Committee meeting not to raise short-term interest rates is perfectly consistent with his New Economy view that high technology and global markets allow the U.S. to aim for faster growth without triggering serious inflation. It is consistent with his sense that official government statistics overstate inflation. And it is consistent with Greenspan's feeling that the U.S. can let unemployment fall to around 5% without automatically stoking inflationary fires.

We don't believe Greenspan's decision was simply a response to the extraordinary politics surrounding the Sept. 24 FOMC meeting, either. There was an unprecedented leak to the press revealing that 8 of 12 Fed regional presidents had already asked the board of governors to raise key interest rates. The FBI is investigating. Did Greenspan seek to discipline the insurgents? We doubt it.

The numbers alone provide him with enough justification to keep monetary policy steady. Economic growth is already slowing. After a sizzling 4.8% rise in the second quarter, the third may come in closer to 2.5%, and the fourth at 2%. Commodity prices are softening, corporate earnings reports are coming in weaker, and gold remains below $400 per ounce. Wages and unit labor costs are up some, but pricing power remains weak. Companies are cutting costs or earnings.

The New Economy view holds that greater business investment, higher productivity, and global competition allow for faster growth without serious inflation. Most chief executives who live in the real world are New Economy converts. Alan Greenspan's decision not to raise short-term rates is helping them compete and prosper. Hawkish Fed regional presidents terrified of growth need a reality check.

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