Alan will stay the course
Market gyrations won't sway Greenspan from rate hikes
By Paul E. Erdman, CBS MarketWatch
Last Update: 3:55 PM ET Apr 5, 2000 Commentary Section
Letters to the Editor
SAN FRANCISCO (CBS.MW) -- At Wednesday's new economy/old economy conference sponsored by the White House, Alan Greenspan made it amply clear that stock market gyrations are not diverting his attention from the two "imbalances" that he sees in the economy, namely excess domestic demand, and a sharply rising trade deficit.
We are going to see the Fed continue on a steady course of gradualism, bumping up the overnight Fed funds rate ...
Raising short-term interest rates ever further is the only weapon that the Fed really has at its disposal as it seeks to redress both of these imbalances.
Therefore, we are going to see the Fed continue on a steady course of gradualism, bumping up the overnight Fed funds rate until there is clear-cut evidence that the economy is slowing, and the danger of rising inflation abating. The objective: to reduce the overall rate of growth to a level that is sustainable and non-inflationary.
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This is so basic to Fed policy that it makes you wonder what those so-called Wall Street economists being trotted out yesterday by, for example, CNBC, were thinking when they said that Tuesday's stock market gyrations will cause the Fed to reverse course and start to lower rates at the next meeting of the FOMC.
Wake up, guys. This ain't 1987.
Yield curve
While we are on the subject of interest rates, if you still are not convinced about the future path of interest rates, just look at the yield curve. Basically it is telling us that short-term rates are going to continue to climb -- as result of Fed action -- while long rates will remain low, as a result of the Treasury continuing use of its cash surpluses to lower the average maturity of its outstanding debt by buying back long maturity Treasurys.
Add it all up, and my conclusion is that, despite the gyrations on Wall Street, we will continue to enjoy a benign interest rate atmosphere in coming months, one that will provide a favorable framework for the continuing health of overall economy in the Year 2000.
Economist and author Paul E. Erdman is a columnist for CBS MarketWatch.
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