Robert Novak

WASHINGTON, D.C. -- Alan Greenspan, in the last year of his long tenure as chairman of the Federal Reserve Board, is described by close onlookers as confused by the economic data. He confronts this question in his final months as America's central banker: Can he avoid the legacy of either a "Greenspan inflation" or a "Greenspan recession"?
 Contrary to the conventional wisdom, recession might be the more realistic danger. The army of number-crunchers at the Fed does not give Greenspan the statistical security blanket he craves. The Consumer Price Index's warning of inflation ahead is regarded by one Federal Reserve governor as "phony." Nevertheless, inflation concerns were rising at the Fed until weaker economic news prevailed going into last Tuesday's meeting of the Federal Open Market Committee (FOMC). Then, three days later, gains in employment reported on Friday suggested greater inflationary danger.

 So, what's a central banker to do? The Greenspan-led Fed ploughs ahead with an inflexible determination to increase the inter-bank interest rate by one-quarter of one percent every time the FOMC meets, no matter what the economy looks like. It did so Tuesday for the eighth consecutive meeting, and there is no end in sight.

 The problem is that, historically, central banks go too far in tightening money, to overshoot their anti-inflation goals. Greenspan famously overshot when the federal funds rate reached 6.5 percent in May 2000, ushering in recession to start George W. Bush's presidency. That ended a doubling of the rate. With last week's increase, Greenspan now has tripled the low of 1 percent. That raises the question of whether the Fed already has tightened enough.

 One sign that might well caution the Fed not to keep raising interest rates is they did not have the desired effect on long-term rates as an anti-inflationary mechanism. Instead of rising, long-term rates dropped a little last week. This phenomenon usually occurs at the end of a long period of tightening, indicating no more interest hikes are needed. But the Fed is not recognizing that signal.

 On the contrary, some members of the FOMC at their previous meeting on March 22 wanted to send a stronger anti-inflation message by dropping language saying that the Fed would continue to fight inflation at a "measured pace." If financiers had found the word "measured" missing, the impact on markets could have been devastating.

Robert Novak

Robert Novak (1931-2009) was a syndicated columnist and editor of the Evans-Novak Political Report.

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