Get Ready for No. 15 in a Series at the Fed
By LOUIS UCHITELLE
nytimes.com
When Alan Greenspan became chairman of the Federal Reserve more than 18 years ago, his first action upon taking the black leather seat at the head of the Fed's huge oak conference table was to raise interest rates. Now it is Ben S. Bernanke's turn.
Today, Mr. Bernanke will convene his first meeting of the Fed's policy makers, joining the other Fed governors and the presidents of the Fed's regional banks in a two-day session that is all but certain to end tomorrow afternoon with another quarter-point rise in short-term interest rates, the 15th consecutive increase.
That will bring the critical rate the Fed controls to 4.75 percent, up from 1 percent in June 2004, when Mr. Greenspan started the process of steadily increasing borrowing costs. Many analysts expect Mr. Bernanke and his colleagues to raise the rate yet again in May, by another quarter of a point.
"They all really want to project a sense of continuity with Greenspan," said Tom Schlesinger, executive director of the Financial Markets Center, "and they are going to err on the side of cautiousness if that is what it takes to do this."
That caution is now ingrained. Starting with Paul A. Volcker in the late 1970's, new Fed chairmen have come into office determined to establish their credibility as inflation fighters. But today, there are few signs that Fed officials are acutely worried about an outburst of inflation.
High oil costs have not translated into upward pressure on wages and prices. A weakening housing market provides another measure of restraint. But the biggest change since 1987, when Mr. Greenspan took over as chairman, is the increasingly global supply of labor and merchandise. This supply helps to alleviate shortages in this country, and in doing so dampens inflation.
Fed officials recognize the shift. "The growing capacity of foreign countries to supply goods and services to the U.S. market has impacted the structure of wages and the bargaining power of workers," Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, said in a recent speech.
But so far Ms. Yellen, like most others at the central bank, remains reluctant to translate this recognition into a new policy approach. "There are good reasons to doubt that such factors are sufficient to sever the usual link between labor market slack and wage and price pressures," she added.
Indeed, some Wall Street forecasters are already warning that the present 4.8 percent unemployment rate effectively constitutes full employment, giving workers here — despite all the low-wage foreigners who are eagerly producing goods for Americans — leverage to bargain for higher wages. According to this view, companies will raise prices to cover the higher labor cost and a wage-price spiral may ensue.
"Inflation pressures are slowly building," Jason Rotenberg, a senior investment associate at Bridgewater Associates, said in a newsletter last week, citing as one reason labor markets that "go from being roughly balanced to tight."
Although Mr. Bernanke is doubtful that labor markets are all that tight, he certainly speaks out on the importance of keeping inflationary expectations firmly in check, just as Mr. Greenspan did.
This is the view that the expectation of rising inflation must be squelched, mainly by raising interest rates to dampen the economy and prevent excessive consumer demand even before inflation begins to accelerate. If the Fed fails to act in a decisive fashion, the argument goes, consumers might rush out to buy in anticipation of higher prices, and these buying sprees would then become an inflationary force.
Suppressing inflationary expectations was much in vogue in the 1980's, and the practice sometimes resulted in recession. But buying sprees could result in spot shortages of American workers and in the capacity of factories within the United States to keep up with demand.
In the last couple of years, however, the Fed's policy makers have begun to debate how much consideration they should give, in setting interest rates, to international forces that might push in the other direction. Leading the charge for a more global perspective in the Fed's deliberations is Richard W. Fischer, president of the Federal Reserve Bank of Dallas.
Mr. Fischer openly contests the view that a low unemployment rate in America risks, by itself, pushing up wages and then prices — not when there are so many people in low-wage countries to help supply the United States with inexpensive goods and services. But he acknowledges that his position is still controversial.
"I think it is inevitable that my colleagues will incorporate global factors in monetary deliberations," Mr. Fischer said in an interview last week. "But serious economists like to have data to back-test and verify, and the data is so bloody new."
Ms. Yellen, in her speech, listed several reasons why she and her colleagues remained reluctant to throw out the old linkage, which had inflationary pressures developing when domestic demand rose. Sure, there are plenty of imports, she said, but they contribute to a growing current-account deficit that will eventually push down the value of the dollar. When that happens, the dollar prices of imports can rise, contributing, in sum, to inflation.
Then, too, foreign and domestic labor are not always interchangeable. All sorts of labor-intensive services, from haircuts to heart transplants, must be performed by workers located within the United States. "Indeed, only 10 percent of American workers are in manufacturing, which is arguably the sector most exposed to foreign competition," Ms. Yellen said.
Still, since the late 1990's, a falling unemployment rate no longer seems to result in predictably higher wages and higher prices. Mr. Greenspan contended that a rising productivity rate was increasing labor's output. Shortages, as a result, were less likely to develop, he argued, and that took pressure off the Fed to raise rates and thus dampen inflation.
What Mr. Greenspan saw primarily as increased productivity was, in Mr. Fischer's view, at least in part, the rising supply of labor and services from other countries. "We at the Dallas Fed," Mr. Fischer said, "have been encouraged by the board of governors to continue our research into the impact of globalization on the American economy and on monetary policy."
For now, though, the Fed is likely to continue on its present course, lifting rates once or twice more and then pausing.
Even minimizing the importance of global supply, Mr. Bernanke has said he does not expect inflation to accelerate. It is moderate now, he told Congress last month, and is likely to remain so through 2007, even falling a little below this year's 2 percent average when volatile food and energy prices are stripped out of personal consumption expenditures, the inflation measure the policy makers watch most closely.
"I am comfortable," the new chairman testified, "with these projections." |
