- The Washington Times - Tuesday, May 16, 2000

Federal Reserve Chairman Alan Greenspan is surely feeling the spotlight today. It isn't only market players who will be closely watching Mr. Greenspan. The whole world is watching. The United States has become the principal engine for global growth and both emerging and developed economies have grown dependent on U.S. consumption of their imports. These countries have an enormous stake in American prosperity and are watching Fed decisions with self-interested attention.

Last week, the Organization for Economic Cooperation and Development (OECD), which represents 29 developed countries, issued a warning regarding the urgent need for monetary tightening in the United States. The OECD suggested that the Fed should boost interest rates by one-half point both today and again in June. The OECD's strident tone reflects the widespread hand-wringing over the health of the U.S. economy. Rather than fixate so much attention on the United States, however, many of these OECD countries might consider pushing forward reforms that would revitalize their own economies.

Although there are some indications that the Fed must take prudent action to curtail signs of nascent inflation, the United States should be wary of the OECD's recommendation. Since many countries have grown dependent on American's consumption of imports, they have a vested interest in boosting the dollar with high interest rates. A strong dollar makes it cheaper for Americans to buy imports.

While some OECD countries could have an ulterior motive for lobbying for two consecutive half-point interest rate hikes, other OECD countries may be recommending an overly aggressive monetary tightening out of the panicked perception that a building economic bubble in the United States could soon pop and take many economies down with it. This counsel is misguided. Economic data suggests that the Fed should boost rates by no more than a quarter point today.

Since the impact of the Fed's past rate increases have taken months to show their economic impact, Mr. Greenspan shouldn't overplay his hand. Since June 30, the Fed has increased the federal funds rate from 4.75 percent to 6 percent. At the same time, the Fed shouldn't ignore recent inflationary data. Last Monday, the government reported that industrial production in April soared a feverish 0.9 percent, the strongest advance in 20 months. The U.S. economy, meanwhile, grew at an annual rate of 5.4 percent in the first quarter. Unfortunately, this heady growth, combined with the lowest unemployment in 30 years, is showing signs of translating into wage inflation. In late April, the government reported that first quarter labor costs shot up at the fastest rate in a decade. The Labor Department's closely watched employment cost index grew 4.3 percent in the 12 months ended in March. The index for personal-consumption expenditures, meanwhile, which the Fed is known to keep a close eye on, spiked up at a 3.2 percent annual rate, the fastest pace since 1994. That index grew a relatively modest 1.5 percent and 0.5 percent in the first quarter of 1999 and 1998, respectively.

In order to prolong the new economy's cycle of defiant growth, Mr. Greenspan should demonstrate prudent concern over inflation today. Nonetheless, an overzealous monetary policy could brake the locomotion of growth much of the world depends on.



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