- The Washington Times - Saturday, June 4, 2005

Dick Fisher is the spanking new president of the Federal Reserve Bank of Dallas and a voting member of the Fed’s open market committee policy arm.

A terribly bright guy, he is somebody who reads the research memos and looks at the data. He may be a Democrat — he was Clinton administration deputy trade representative — but my kind of Democrat. In short, he is a pro-market, pro-business free-trader who doesn’t think profit is a dirty word.

So when Mr. Fisher told CNBC “we’re clearly in the eighth inning of a tightening cycle,” he wasn’t just tossing any old baseball analogy at the economy. He was saying he believes Fed monetary policy has well contained core inflation.

Listen to this pro call the game: “We have the ninth inning coming up at the end of June; we feel strongly we have been getting good, fast, hard pitches right down the pike.”

Mr. Fisher was of course talking about Fed restraining moves, and he did add “there is room to tighten a little bit further.” But he finally said the Fed has “to get rates to a point where you have that stasis — neither stimulating inflation nor discouraging economic growth. We are not quite there yet — we are getting closer, and as they say … stay tuned.”

The Fed has raised its target rate since June 2004 from 1 percent to 3 percent. Mr. Fisher seems to imply it would go to 31/4 percent and hold there at least several months. This is exceptionally good news for the investor class and the economy. To be sure, Mr. Fisher is hardly speaking from left field. The indicators soundly back him up.

The oil-price shock has not spilled over into nonoil or nonenergy price increases. The core consumer spending deflator (excluding food and oil) — Alan Greenspan’s favorite price measure — has been steady at only 1.6 percent growth over the last eight months.

What’s more, sensitive commodity and market-price indicators that tend to lead inflation have turned down with a vengeance. This includes gold, raw materials and Treasury-bond rates. Meanwhile, the difference between long- and short-term interest rates, known as the slope of the Treasury yield curve, has narrowed substantially, though it still remains positive and normal. These are all signs inflation is contained and well within the Fed’s target range.

Market price signals forecast continued economic expansion with low inflation — exactly what Greenspan & Co. desire. In effect, the Fed has reigned in the money supply to curb inflation fears, while the supply-side tax cuts put in place two years ago continue providing economic growth incentives.

The genius of the Bush tax plan was it lowered the burden on capital investment — the seed corn for business expansion and job creation. The genius of the Greenspan Fed up to now has been its removal of post-September 11, 2001, excess money without throwing the economy into stagnation or recession. The combination of these two policy levers — lower taxes for growth and stable money for price stability — suggests the current noninflationary prosperity cycle can last many years.

Investors reacted joyously to Dick Fisher’s statement. The stock market rose by more than 100 points, and the bellwether 10-year Treasury bond rate dropped to 3.91 percent. Stocks signal future growth, while bonds anticipate low inflation.

Mr. Fisher may speak only for himself, but there’s more to it. While numerous mainstream economists try to belittle his remarks by suggesting he’s a rookie in the big leagues, they have nothing to stand on but their mistaken forecasts that strong growth will create higher inflation and a big upturn in long-term interest rates. They’ve been dead wrong for years.

Growth never causes higher inflation, nor do people who work and prosper. Inflation is a monetary problem, and after a brief period of excess money creation, the Fed removed inflationary money. The lower Bush tax rates did their part by increasing availability of goods and investments to absorb money supply and provide a counter to potentially inflationary developments.

It’s likely Dick Fisher, who’s no gun-slinging hip-shooter, is reflecting a sub rosa buzz inside the Federal Reserve System. The buzz is that the Fed has held down inflation and that the tightening cycle is coming to an end.

It’s too early to expect a formal policy comment to this effect. But it’s clear there’s a considered view within the central bank that economic and inflationary conditions are far better than the predictably dour and declinist mainstream media would have us believe.

Lawrence Kudlow is host of CNBC’s “Kudlow & Company” and is a nationally syndicated columnist.

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