What is happening? How can a major paper quote Baker, Schlessinger, and Galbraith at the same time? Where are the rest of the bank economists? The article quotes only one? Who speaks for Wall Street? What biased reporting! I don't think that this reporter will be on the job long. He/She might end up on pen-l. Robert Naiman wrote: > The Christian Science Monitor > > June 21, 1999, Monday > > SECTION: FEATURES; WORK & MONEY; CAPITAL IDEAS; ECONOMIC SCENE; Pg. > 17 > > LENGTH: 744 words > > HEADLINE: Economists challenge Fed's inflation 'hunch' > > BYLINE: David R. Francis, Staff writer of The Christian Science Monitor > > DATELINE: BOSTON > > BODY: > > > Economists have had a hard time predicting inflation rates this decade. > > "The record hasn't been great," says Dean Baker, an economist with the > Preamble Center, a > Washington think tank. > > So the Federal Reserve is taking something of a gamble if it raises > interest rates to slow the economy > in a "preemptive" action against inflation. > > The risk is that a rate hike - or hikes - could damage the nine-year-old > economic expansion in the > United States and its accompanying prosperity. It also could clobber stock > prices. > > But in testimony to Congress last Thursday, Fed Chairman Alan Greenspan all > but announced that a > "modest" rate hike would be taken at a monetary policy session June 29-30. > > To Mr. Baker, the Fed's expected hike in short-term rates of 0.25 percent > to 5 percent would be > based on a mere "hunch" - not any solid predictive power. > > In the minutes of a Fed policymaking session of last February, some > participants acknowledged that > they had been constantly surprised that inflation had not picked up as > unemployment steadily > dropped to its present 4.2 percent rate. > > Further, in the Fed's semiannual reports to Congress in the last few years, > its inflation predictions > have been too high. > > "Fed officials have been pretty clear in saying that traditional methods of > forecasting inflation are not > serving us well," notes Thomas Schlesinger, executive director of the > Financial Market Center in > Philomont, Va. > > Mr. Greenspan admitted that guiding monetary policy by its present models > of the economy "would > have unduly inhibited what has been a remarkable run of economic prosperity." > > But many in the financial community have great confidence in the judgment > calls of Greenspan. > > Both stock and bond prices rose after his strong hint of a rate hike ahead. > > "If the goal is to prevent or limit a rise in inflation, since monetary > policy works with a lag, it is prudent > to start imposing some restraint now," says Paul Kasriel, an economist with > Northern Trust Co., > Chicago. > > Even those Fed watchers keen on low interest rates as a way to help > low-income workers win bigger > wage increases praise Greenspan for letting the jobless rate fall so low. > > Greenspan's rationale for a preemptive move is that "certain imbalances" in > the economy pose a risk > to the longer-run outlook. But he acknowledged that an acceleration in > productivity resulted in an > underprediction of economic growth and an overprediction of inflation, and > that labor-market > tightness has not yet put the expansion at risk. > > "Inflationary pressures still seem well contained," he said. > > Nonetheless, he saw a danger that a growing scarcity of workers could > provoke large inflationary > wage gains. > > And, he added, because higher interest rates take time to slow the economy, > "we have to make > judgments ... about how the economy is likely to fare a year or more in the > future under the current > policy stance." > > In effect, he pronounced a speed limit for the economy of 3 percent growth > in national output after > inflation. But output grew almost 4 percent last year and even faster than > that in the first quarter of > this year. > > Those hoping the Fed will not put on the brakes, offer at least three > counterarguments: > > 1.The lag between Fed braking and the economy slowing is short. So the Fed > can afford to wait for > more inflation to appear. > > Some impact of an interest-rate hike takes place in two months, though the > full impact may take 18 > months or two years, says Baker. > > 2.Rapid inflation doesn't spring forth full-blown. > > "It grows incrementally," says Mr. Schlesinger. So the Fed has some time to > restrain it. > > James Galbraith, an economist at the University of Texas, Austin, says the > Fed could allow the > unemployment rate to fall even further, 0.1 percentage point at a time, and > then see if inflation starts > to accelerate. "Watch what happens," he says. > > 3.Though there are some signs of recovery abroad, the world economy is > still shaky. > > "The US cannot consider itself in isolation," says Gordon Richards, an > economist of the National > Association of Manufacturers in Washington. "It must create dollar > liquidity for the world." > > But Greenspan sees inflation as a danger to prosperity. "Our > responsibility," he said, "is to create the > conditions most likely to preserve and extend the expansion." > > > GRAPHIC: PHOTO: GREENSPAN: The Fed chief hints of a rate hike. > Someeconomists disagree > with the idea. BY JOE MARQUETTE/AP > > LANGUAGE: ENGLISH > > LOAD-DATE: June 20, 1999 > ------------------------------------------ > Neil Watkins > [EMAIL PROTECTED] > The Preamble Center > 1737 21st Street, NW > Washington, DC 20009 > Tel - (202) 265-3263 x280 > Fax - (202) 265-3647 > Web - http://www.preamble.org > > To join the Preamble Center's listserv for announcements and updates on new > research and activities, > access http://www.preamble.org/subscribe.htm. > > ------------------------------- > Robert Naiman <[EMAIL PROTECTED]> > Preamble Center > 1737 21st NW > Washington, DC 20009 > phone: 202-265-3263 > fax: 202-265-3647 > http://www.preamble.org/ > ------------------------------- -- Michael Perelman Economics Department California State University [EMAIL PROTECTED] Chico, CA 95929 530-898-5321 fax 530-898-5901
