An utterly stupid editorial in WSJ about the latest rate hike and AG.
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August 26, 1999
Explain It Again?
So the Federal Reserve went through with its interest rate hike Tuesday, and the crew headed off to its annual bash in Wyoming. The markets can relax, take a deep breath and . . . start holding it again. That's because there's still no knowing by what precise logic the Fed has already twice these past two months raised rates.
Oh, right. The Fed did say in its press release that the reason for raising target rates 25 basis points this week, as it also did in June, is to "markedly diminish the risk of rising inflation going forward." What inflation? There's no inflation out there, at least not according to the indicators we suppose Chairman Greenspan would be checking. Perhaps fortunately, the main effect of these two small rate hikes so far seems to be confusion over why the Fed does what it does. Get ready for an autumn season of suspense, opening soon, in which no one knows whether the Fed might tighten rates for the third time this year, when its next Open Market Committee meeting rolls around on October 5.
We wish we could suggest just looking to the Fed's own statements about its urge to fiddle with rates next time. But that, too, is dicey. Tuesday's Fed statement contained the luminous phrase that the Open Market Committee's impulses would be "symmetrical with regard to the outlook for policy over the near term"--which translates as, they think they'll stay put for a while. Except that this is what the Fed said last time, in June, when it claimed "no predilection about near-term policy action." But this week it nonetheless tightened.
Understandably, there is some skepticism out there that this is indeed the last rate boost for a while. The suspicion remains that what's scaring the Fed is the odd old notion that economic growth, which goes hand-in-hand with job creation, will somehow cause inflation. That's how the world works according to the Phillips Curve, an economic model that seems to loom large in the Fed's private antique collection but has offered no useful predictive power in the marketplace for more than 20 years. And of course, if the Fed is intent on slowing the economy, two quarter-point rate boosts will not be enough. Will the Fed find itself continuing to tighten, even with no hints of inflation on the horizon, until it satisfies itself by "taking away the punchbowl?"
Mr. Greenspan's 13 years running the Fed have been a sweeping success story of economic growth accompanied by low inflation. So we're not quarreling with Mr. Greenspan's record. Whatever he does, it seems to be working. We are, however, noting that the problem these days is not the inflation Mr. Greenspan seems to fear. It's the difficulty the markets face in actually deciphering the rules that guide Mr. Greenspan.
Can anyone at the Fed--especially Mr. Greenspan--explain why the markets should be forced to worry about the Fed's unfounded worries about a theory that has turned out to be nonsense? For as long as the Fed wants to worry, we all have to worry. On the wires we read that, after Tuesday's rate hike, the next key in predicting future Fed behavior will be next week's release of employment data. This will be the only employment report due out before the next Open Market Committee meeting.
Back in June, we suggested that Mr. Greenspan go public with his secret roadmap to Fed decisions. That seems unlikely, if not unrealistic. So for now we'll propose a simpler plan, which is that the Fed Chairman limit his lingo to words of two syllables or fewer, and try telling us again why the Fed raised rates Tuesday. Maybe if Mr. Greenspan goes that far toward giving a clear rule, the rest of us can figure out for him how he does it. And we might all know better what to expect down the road.
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