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Strategies & Market Trends : Commodities - The Coming Bull Market -- Ignore unavailable to you. Want to Upgrade?

To: craig crawford who wrote (1201)	3/24/2002 9:36:34 AM
From: craig crawford	Respond to of 1643

Would a Pinch of Inflation Help? businessweek.com Greenspan has signaled that he might allow a pickup in prices if it boosts companies' profit margins -- a risky strategy ............................................................................................................... Now, the Fed chief looks ready to again test his credibility as an inflation foe as he strives to rekindle the New Economy. In presenting the Fed's semiannual economic update to Congress on Feb. 27, Greenspan signaled that he will tolerate a pickup in inflation if that's what it takes to ease companies' pinched profit margins. That has big implications for monetary policy: Greenspan will be slow to tighten credit as the recovery gains steam to give profit-starved companies a chance to jack up prices. It's a risky strategy, to be sure. If bond investors conclude Greenspan has gone soft on inflation, they're likely to push long-term interest rates sharply higher, aborting the recovery in the process. "Greenspan has a lot of credibility, but he'd have a big sales job to convince the market of his stance," says Louis Crandall of consultants R.H. Wrightson & Associates. .......................................................................................................................... Greenspan believes any rise in inflation early in the recovery will prove short-lived. Industrial companies are operating at 74% of capacity, the lowest level in 18 years. With so much slack in the economy, companies can raise prices only so far in response to firming demand before competitors undercut them. DEFLATION? Controlling inflation longer-term will depend on holding the line on corporate costs, particularly unit labor costs, the biggest component of company outlays. If those costs take off, inflation may spiral upward as companies try to raise prices to recoup their expenditures. But with productivity strong and unemployment higher than it has been for a while, Greenspan sees little, if any, threat of that happening. If anything, he seems more worried about deflation. With inflation running just 1.5% last year and business awash in excess capacity, that's no surprise. When growth took off in the 1990s, Greenspan bet on inflation remaining in check. That winning wager helped launch the New Economy. Now, once again, he's counting on the New Economy to keep costs contained and inflation low. And he's willing to hold interest rates down -- and put his credibility on the line -- to prove it.