Greenspan Cages Inflation Hawks

"Pull over, economy, you're going too fast."

Some economists say the Federal Reserve - America's monetary police officer - should write out a speeding ticket (higher interest rates) when it meets in Washington tomorrow.

"The Fed ought to tighten," says Cynthia Latta, an economist at Standard & Poor's DRI, a consulting firm in Lexington, Mass.

"I constantly worry they have been mistaken in the last year or so in not tempering things," echoes Robert DiClemente, an economist with Salomon Smith Barney, an investment bank in New York.

Most Fed watchers, though, assume the 12 voting members of the Fed's Open Market Committee (FOMC) will leave short-term interest rates alone and not attempt to slow the economy to prevent a revival in inflation.

At least for now.

Of course, the Fed could pull a surprise, as it has on occasion. But many Fed watchers assume the central bank will be wary of shocking financial markets, and will give some advance hints of a any change in policy.

In a democracy, Mr. DiClemente speculates, Fed officials may feel obligated to explain a policy step that would touch virtually all households with higher costs on mortgages, car loans, and credit-card balances.

A surprise hike in interest rates, though probably only 0.25 percentage point, could cause something near panic among investors in long-term bonds and corporate stocks. Prices would plunge sharply. Investors would assume the rate hike was first of several.

Financial markets in Asia, already on edge because of the violence in Indonesia, would be further troubled.

Members of Congress have been saying the International Monetary Fund should be more open, more public, in its demands on Asian nations facing an economic crisis. The Fed may sense a similar need for accountability. It does now announce its policy decisions immediately, rather than waiting for weeks to do so.

In any case, Fed Chairman Alan Greenspan did give plenty of warning before the Fed raised interest rates a tad in March 1997.

Some hawkish members of the FOMC have wrung their hands lately about the speeding economy, suggesting that restraint might be necessary "eventually." At its last session, the Fed reinstated a formal policy bias toward tightening.

But Mr. Greenspan has passed up opportunities to worry out loud that the Asian crisis has not slowed the American economy sufficiently to stave off inflation.

Greenspan has such a solid reputation in the business community and Congress that it would be awkward for the other Fed governors or the presidents of regional Fed banks to override his view. It is the chairman who meets with President Clinton, as occurred recently.

Maybe if 10 members of the FOMC thought it was time to slow the economy down, they might vote against the chairman and a supporter, suggests Ms. Latta.

But no such super-majority is in sight on the FOMC.

Another reason the Fed isn't likely to boost interest rates is that there is "no smoking gun." Inflation remains low.

True, last week the Bureau of Labor Statistics reported the first jump in wholesale prices in seven months, largely due to higher tobacco prices. And the next day, the BLS said the consumer prices rose 0.2 percent in April, the largest increase in six months. But for the first four months of the year, inflation ran at a modest 0.9 percent annual rate.

Most economists saw no reason in either inflation measure to sound an alarm bell. They expect that with oil prices likely to drift higher, the year may end with consumer prices up about the same as last year's 11-year low: 1.7 percent.

Economists' concerns are mostly longer term. Business can't find enough workers. As a result, employees can demand higher wages. That will push up labor costs and reduce profits, maybe hitting stock prices. Eventually business will raise prices to cover costs. Rising inflation will prompt the Fed to act.

But not yet.