You have to give Alan Greenspan credit. No matter how often critics accuse him of being an economic Chicken Little, he sticks to his guns.
The Federal Reserve’s decision last week to raise short term lending rates in an effort to head off inflation was pure Greenspan. Like agents Mulder and Scully in the X-Files, the Fed chairman has been warning us about the specter of inflation that never quite seems to appear.
Indeed, the same day the Fed Board and the Federal Open Market Committee raised the discount and prime interest rates by half a point , the largest hike in more than five years , the Labor Department reported that the Consumer Price Index was holding steady. Not exactly the kind of news you would expect if the inflation ghoul was working its dark powers on the economy.
Greenspan’s critics point to that fact as evidence the economy is already slowing, either of its own accord or as a result of the Fed’s five quarter-point rate hikes over the past 11 months.
However, the one month reprieve from price growth we saw in April doesn’t necessarily mean a stake has been driven into inflation’s heart. Prices climbed more 5 percent in February and nearly 7 percent in March. In 1999, price growth paused for two months following a more than 6 percent jump in April, then resumed small but steady growth for the rest of the year.
Greenspan has a persuasive argument for fearing inflation. The Fed chairman points out that in this hard-charging economy, demand of goods and services is outstripping supply, a situation that inevitably results in higher prices. The low unemployment rate, too, is set to cause an inflationary rise in wages.
The central bank chairman also argues a robust economy has meant a larger trade deficit that the U.S. economy cannot support.
Yet in raising rates, Greenspan plays with fire. By raising them, the Fed is attempting to create a sort of controlled, artificial inflation in order to prevent a wildfire of inflation from occurring in later months.
The problem is this: It can take upward to 12 months for the impact of a rate hike to show on the economy. If the quarter-point raises of the past several months are making themselves felt just as a whopping half-point hike takes effect, the result could be disastrous. The recent wildfire in New Mexico shows how dangerous a controlled burn can be if it gets out of hand.
Nevertheless, Alan Greenspan is a thoughtful and judicious man, whose economic genius has led him to serve as Fed chairman under three presidents, Republican and Democrat alike. A follower of the conservative free market philosophy of Ayn Rand, he is not one to monkey with the economy unnecessarily.
If Alan Greenspan says there’s a spook out there, there must be , somewhere.