- The Washington Times - Wednesday, October 12, 2005

A mischievous Federal Reserve Bank president has needlessly panicked Wall Street by spreading a wildly exaggerated fear of inflation.

The last thing the U.S. economy needs, after all its hurricane-driven troubles, is a knee-jerk bearish stock market. Last month, when it appeared the economic aftermath of Katrina and Rita wouldn’t be quite as bad as the pessimists forecast, the markets appeared to modestly recover (even with the ups and downs of oil and gas prices).

But then Dallas Fed Bank President Richard Fisher delivered a speech in Waco, Texas, last week warning of an “inflation virus” poised to bring down the economy and the nation’s financial system if the Fed didn’t continue raising interest rates.

Using overheated metaphors suggesting an economy gripped by a terrible disease whose cure was the economic equivalent of bleeding, Mr. Fisher’s speech had its intended effect.

“We cannot let the equivalent of sclerosis block the arteries and disrupt the workings of the circulatory system,” he said. “Nor can we let the inflation virus infect the blood supply and poison the system.”

Wall Street took that to mean the Fed would continue pounding the economy with higher interest rates to slay a bogeyman few can see in the real world of price wars and cost containment in a fiercely competitive global economy.

His remarks had immediate effect, sparking a downward spiral in the Dow industrials that pushed the stock index to its sharpest four-day decline since June — and by Monday to its lowest close since May. The Wall Street Journal last week fingered Mr. Fisher as one of the culprits undercutting the markets, saying, “A whiff of inflation has blown fear through the stock market,” specifically singling out Mr. Fisher’s remarks.

This wasn’t the first time Mr. Fisher roiled the markets. On June 1, he said the Fed was “clearly in the eighth inning of a tightening cycle,” meaning much more tightening lay ahead.

But cooler economic minds do not see the inflationary viruses Mr. Fisher warns about.

“These fears are grossly exaggerated, and higher interest rates may cripple the economy,” says University of Maryland economist Peter Morici.

The question that haunted the economy throughout this year’s oil and gas price increases has been whether these spikes would sharply increase prices of nonenergy goods. The answer? Not that much. “So far, very little passthrough seems to have occurred,” Says Mr. Morici’s latest analysis, appropriately, “Is the Fed Unnecessarily Scaring Stock Markets?”

“The producer price index for final consumer goods, less energy, fell in August. Look at autos. It’s not just the Big Three that have been forced to trim prices but also the Japanese nameplates, too,” he writes.

Among his key points: Higher productivity in recent months has allowed businesses to absorb somewhat higher material prices. Moreover, they know “consumers have little additional cash to spend on higher-priced goods” because of gas prices.

But market-share competition, fierce and relentless, is the big factor that has kept inflation under control. “We simply have too much competition in the marketplace, and labor markets show no sign of igniting a wage-price spiral,” Mr. Morici says.

Still, the back-to-back hurricanes in the Gulf Coast, which shut down drilling rigs and gasoline refineries, have raised energy costs, though we seem to be coping with it. Eight refineries were either shut down or operating at reduced rates as of this writing. Oil and natural gas production lines were down significantly, but they’re gradually coming back, which will exert some downward pressure on future gasoline prices.

Some other positive economic signs: September job losses from Katrina were smaller than anticipated, while, notably, job creation in July and August was revised upward. Before last month’s 35,000 jobs loss, the market was adding nearly 200,000 jobs in each of the previous 12 months.

The housing market bubble shows no sign of bursting. Existing home sales were the second-highest level ever recorded.

In manufacturing, durable goods orders were up, while recent earnings reports have been bullish. General Electric forecast another strong quarter. Alcoa’s profit report this week beat analysts’ forecasts, and retail sales have been better-than-expected, too.

All this throws into question the continued Fed interest rate increases. If the Fed means to slow the economy, that can be achieved well enough through lowered consumer confidence, strained discretionary spending and high gas prices, thank you.

But over-the-top inflation rhetoric that spooks the markets and growth-bashing interest rate increases risk doing much more harm to this economy than Katrina and Rita ever did.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.



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