Mark The Trader:WallStJ. Edit.: " Alan G. don't raise rates: no inflation ".
Editorial
January 5, 2000
interactive.wsj.com
Review & Outlook
Greenspan Reups
Maybe Alan Greenspan isn't God after all. The Federal
Reserve chairman was reappointed yesterday and the
financial markets that supposedly think he walks on
water promptly staged one of their largest selloffs ever,
the Dow falling by 359 points, the invincible Nasdaq by
229.75, its largest one-day point slide. Maybe there's a
lesson or two in here somewhere.
Markets closed the millennium at extraordinary heights,
of course, and a retreat is in itself no great cause for
alarm. In the longer run the Greenspan appointment is
reassuring, if only by foreclosing President Clinton from
bandying the appointment around as this campaign's
Lincoln bedroom. By reappointing Mr. Greenspan six
months before his third term expires, Mr. Clinton is
wrapping himself and his Vice President in the
Greenspan legacy. Mr. Clinton is pulling out all the
stops to elect Mr. Gore, against both the insurgent
Bradley campaign and the gathering Republicans. One
such effort is to attach the Vice President to today's
prosperity; yesterday Mr. Gore all but nominated Mr.
Greenspan for sainthood while endorsing his
reappointment, an attempt at virtue by association.
Mr. Greenspan indeed has an estimable record, one
we've repeatedly commended. The Fed boss's
commitment to price stability over the past 12 years is a
large reason for the 1990s' run of prosperity. Not all that
long ago there were still politicians who listened to
economists who thought inflation had its benefits. In
addition to monetary stability, we've also just run an
experiment in what kind of economy results when a
compulsively intrusive Presidency is checked and
thwarted from doing anything significant, such as
HillaryCare, for eight years. Quod erat
demonstrandum: When Washington spins its wheels, the
economy roars forward.
For all of that, yesterday's plunge was strikingly sharp,
and it's pretty clear that lately markets have begun to
wonder what's driving the invisible head behind Mr.
Greenspan's visible monetary hand. To judge by its
public explanations, the Fed now seems bent upon
raising interest rates, but for the odd reason that the
country is too prosperous. In raising rates last November
(for the third time last year), the Fed explained that "the
expansion of activity continues in excess of the
economy's growth potential."
This hardly sounds like a
concern over rising prices. Instead it sounds
suspiciously like a Greenspan version of the old,
discredited Phillips Curve, which held that too many
people working causes inflation.
It is after all hard to detect any signs of inflation, past or
future. The dollar price of gold is back down around
$285, about where it was a year ago and well off its
1999 high near $325. Other commodity prices also seem
in check, with the exception of oil, which can be
explained by OPEC's success in controlling production.
The 30-year bond has been creeping higher for the past
year, but not unusually so during such a long expansion.
The Fed deferred another rate increase in December, but
mainly, it said, to provide enough liquidity to ensure "a
smooth transition into the Year 2000."
The millenium having arrived without the Apocalypse,
or even any bank runs, markets can be forgiven if they
now conclude that the Greenspan Fed will once again
return to raising rates. So better sell equities. All the
more so once the chairman has been safely reappointed
and can do as he pleases.
Clearly Mr. Gore has no interest in further Greenspan
rate increases, though their full economic impact
probably wouldn't hit until after November. But the veep
does have a political need to deflect any Republican tax
cut this year, especially with George W. Bush having put
one on the table. Without suggesting any quid pro quo,
we doubt it was lost on the Clinton-Gore team that last
year the Fed chairman publicly groused about Congress's
tax cut. We predict Mr. Gore will be quoting Mr.
Greenspan before the year is out to bash Mr. Bush on
taxes. This means even less chance for
growth-producing fiscal policy in the next year.
Our point here isn't to grumble about the Greenspan
regency. Paul Volcker aside, we can't think of anyone
better to run monetary policy from his hip pocket. But
that's what he does, no more evidently so than in the past
year. Having dismissed the Phillips Curve many times
himself, Mr. Greenspan now seems to be invoking it in
so many words to justify higher rates. No wonder
markets are so jittery.
Mr. Greenspan, we should add, is also 73 years old.
The Greenspan legacy would be much enhanced if he could
in his fourth term as chairman do more to publicly
explain and institutionalize the Fed's inflation-fighting
obligation. In particular this would mean speaking up in
favor of Florida Senator Connie Mack's legislation
making price stability the Fed's statutory policy goal.
Mr. Greenspan seems as vital as ever, but not even Fed
chairmen live forever. A Fed chairman endorsed by both
George W. Bush and Al Gore has the political capital to
do more than govern by the seat of his pants.
------------------
WallSt Jour Editorial: " Alan G. don't raise rates: no inlation ".
January 5, 2000
interactive.wsj.com
Review & Outlook
Greenspan Reups
Maybe Alan Greenspan isn't God after all. The Federal
Reserve chairman was reappointed yesterday and the
financial markets that supposedly think he walks on
water promptly staged one of their largest selloffs ever,
the Dow falling by 359 points, the invincible Nasdaq by
229.75, its largest one-day point slide. Maybe there's a
lesson or two in here somewhere.
Markets closed the millennium at extraordinary heights,
of course, and a retreat is in itself no great cause for
alarm. In the longer run the Greenspan appointment is
reassuring, if only by foreclosing President Clinton from
bandying the appointment around as this campaign's
Lincoln bedroom. By reappointing Mr. Greenspan six
months before his third term expires, Mr. Clinton is
wrapping himself and his Vice President in the
Greenspan legacy. Mr. Clinton is pulling out all the
stops to elect Mr. Gore, against both the insurgent
Bradley campaign and the gathering Republicans. One
such effort is to attach the Vice President to today's
prosperity; yesterday Mr. Gore all but nominated Mr.
Greenspan for sainthood while endorsing his
reappointment, an attempt at virtue by association.
Mr. Greenspan indeed has an estimable record, one
we've repeatedly commended. The Fed boss's
commitment to price stability over the past 12 years is a
large reason for the 1990s' run of prosperity. Not all that
long ago there were still politicians who listened to
economists who thought inflation had its benefits. In
addition to monetary stability, we've also just run an
experiment in what kind of economy results when a
compulsively intrusive Presidency is checked and
thwarted from doing anything significant, such as
HillaryCare, for eight years. Quod erat
demonstrandum: When Washington spins its wheels, the
economy roars forward.
For all of that, yesterday's plunge was strikingly sharp,
and it's pretty clear that lately markets have begun to
wonder what's driving the invisible head behind Mr.
Greenspan's visible monetary hand. To judge by its
public explanations, the Fed now seems bent upon
raising interest rates, but for the odd reason that the
country is too prosperous. In raising rates last November
(for the third time last year), the Fed explained that "the
expansion of activity continues in excess of the
economy's growth potential."
This hardly sounds like a
concern over rising prices. Instead it sounds
suspiciously like a Greenspan version of the old,
discredited Phillips Curve, which held that too many
people working causes inflation.
It is after all hard to detect any signs of inflation, past or
future. The dollar price of gold is back down around
$285, about where it was a year ago and well off its
1999 high near $325. Other commodity prices also seem
in check, with the exception of oil, which can be
explained by OPEC's success in controlling production.
The 30-year bond has been creeping higher for the past
year, but not unusually so during such a long expansion.
The Fed deferred another rate increase in December, but
mainly, it said, to provide enough liquidity to ensure "a
smooth transition into the Year 2000."
The millenium having arrived without the Apocalypse,
or even any bank runs, markets can be forgiven if they
now conclude that the Greenspan Fed will once again
return to raising rates. So better sell equities. All the
more so once the chairman has been safely reappointed
and can do as he pleases.
Clearly Mr. Gore has no interest in further Greenspan
rate increases, though their full economic impact
probably wouldn't hit until after November. But the veep
does have a political need to deflect any Republican tax
cut this year, especially with George W. Bush having put
one on the table. Without suggesting any quid pro quo,
we doubt it was lost on the Clinton-Gore team that last
year the Fed chairman publicly groused about Congress's
tax cut. We predict Mr. Gore will be quoting Mr.
Greenspan before the year is out to bash Mr. Bush on
taxes. This means even less chance for
growth-producing fiscal policy in the next year.
Our point here isn't to grumble about the Greenspan
regency. Paul Volcker aside, we can't think of anyone
better to run monetary policy from his hip pocket. But
that's what he does, no more evidently so than in the past
year. Having dismissed the Phillips Curve many times
himself, Mr. Greenspan now seems to be invoking it in
so many words to justify higher rates. No wonder
markets are so jittery.
Mr. Greenspan, we should add, is also 73 years old.
The Greenspan legacy would be much enhanced if he could
in his fourth term as chairman do more to publicly
explain and institutionalize the Fed's inflation-fighting
obligation. In particular this would mean speaking up in
favor of Florida Senator Connie Mack's legislation
making price stability the Fed's statutory policy goal.
Mr. Greenspan seems as vital as ever, but not even Fed
chairmen live forever. A Fed chairman endorsed by both
George W. Bush and Al Gore has the political capital to
do more than govern by the seat of his pants.
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