- The Washington Times - Wednesday, June 7, 2006

There are times in the ups and downs of the economy when the best thing the Federal Reserve Board chairman can do is say is little as possible. This is one such time.

The financial markets are volatile enough, with global jitters over terrorism, oil prices surging to unprecedented highs and the specter of a nuclear Iran threatening to interrupt fuel supplies. But Fed Chairman Ben S. Bernanke’s conflicting statements about the economy and inflation have only made things worse.

One moment Mr. Bernanke hints the Fed may pause in its interest rate increases, then he says inflation is really not that bad, and now this week he raised new concerns it may be worse than he previously believed.

Mr. Bernanke came into the Fed chairmanship promising a clearer picture of the Fed’s thinking, but that promise has turned into a topsy-turvy, roller-coaster ride of contradictory public statements that have roiled the stock markets and left investors increasingly anxious about their financial future.

Monday’s near-200 point drop in the Dow was the latest example of what Mr. Bernanke has wrought in the short time he has been at the Fed’s helm. He has left many investors longing for a return by former Fed chief Alan Greenspan whose murky microanalysis of economic matters was often so opaque no one could be sure what he meant.

There are a number of reasons I think Mr. Bernanke and the Fed overemphasize the threat of inflation and are in danger of sandbagging an economy that remains strong.

The first is the inflation-measuring yardstick, which is woefully outdated and often excludes price-deflating movements in the economy from cost-savings technologies, higher productivity that has lowered per unit production costs, a competitive global economy whose imports have held prices down here and a revolution in downsizing that has cut overhead while boosting sales, profits and reinvestment.

Prices have plummeted for products once beyond the reach of average consumers — from cell phones to desktop computers, from telecommunications costs to generic drugs. It’s a long and growing list but not fully included in the government’s inflation basket.

Mr. Bernanke says the core inflation rate, which excludes volatile energy prices, is running between 2.3 percent and 3 percent, above the Fed’s 1 percent to 2 percent target. I think the core rate is closer to the Fed target and, even if a bit higher, tends to be absorbed in a massive $12 trillion economy.

And what exactly is the visible harm to the economy that has so frightened the Fed into hammering the economy with much higher interest rates?

Unemployment is a low 4.6 percent, as a result of 5.3 million new jobs created in the last three years. But wages were up by less than 0.1 percent in May, hardly a sign labor costs were rising at an excessive rate that could worsen inflation.

Productivity, inflation’s worst enemy, rose by a robust annual rate of 3.2 percent in the first quarter. Personal incomes were up by 6.7 percent in the month of April. Industrial production rose 4.7 percent in the past year.

Corporate earnings on the whole have been spectacular. U.S. exports have been brisk. The economy came roaring out of the first three months of 2006 with a robust 5.3 percent growth, but with its core inflation rate remaining within modest bounds.

Though there are signs the economy may cool off a little which, after all, is what the Fed wants, this economy is not remotely in any danger of tanking. Unless the Fed overshoots in its zealous and misdirected drive to slow its growth.

What Mr. Bernanke never seems to acknowledge — and what the Fed may be ignoring — is the free market’s self-correcting mechanisms to keep the economy from overheating and to keep inflation in check.

Rising oil prices certainly are an additional cost to the economy, much like the Fed’s interest rate raises, but fuel prices are effectively applying the brakes to an economy that appears to be gently slowing down.

Higher fuel costs tend to get passed on in the costs of everything we buy or are absorbed by businesses trying to keep their prices competitive enough to retain their customers.

But the overlooked story of the oil price surge is that thus far it has not appreciably dampened economic growth. The U.S. economy has for the most part absorbed the higher costs, often offsetting them with cost-cutting elsewhere in the means of production, distribution and marketing.

Take the airline business, for example. Gloom-and-doom analysts have long predicted higher fuel costs would sack the industry. The airlines certainly have had to struggle since the September 11, 2001, terrorist attacks brought airline travel to a near halt. But right now higher fuel prices haven’t dampened air travel. “With a record 207 million passengers expected to fly this summer, the airline industry is on track for one of its best periods in years,” writes Keith Alexander in The Washington Post on Tuesday.

This economy is a lot stronger than the bears give it credit for, but is it strong enough to withstand further Fed pounding?

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

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