BUSINESSWEEK ONLINE : JUNE 19, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY Commentary: Greenspan Hasn't Brought This Baby Down Yet For a few days in June, the exuberance in the stock and bond markets seemed almost rational. After the Labor Dept. reported that unemployment in May rose for the first time in three months, traders figured the Federal Reserve's campaign of six small interest-rate hikes had achieved the desired effect of braking economic growth. Time to uncork a nice Puligny-Montrachet and toast the arrival of Federal Reserve Chairman Alan Greenspan's much-anticipated soft landing. Better put down that wine glass. The May jobs report was just one data point in an otherwise buoyant economy. Fed officials remain unconvinced--not only by the unemployment numbers, which they question even after rechecks by the Bureau of Labor Statistics--but also by the reality of the so-called slowdown. ''We will need more information before we can strongly conclude that economic demand is moderating,'' Federal Reserve Bank of Richmond President J. Alfred Broaddus told Business Week. BREATHER. So how many statistics are necessary before the slowdown becomes credible? And could an overly inflation-phobic Fed oversteer the economy into a downturn, given the 12-month-plus lag before Fed actions start to bite? These questions plague Greenspan, as they did when he was faced with a similar situation in 1994. But while the Fed chairman is wary of planting the seeds of recession through too many hikes, the greater risks appear to be on the side of becoming too complacent. The most recent data show the economy is still expanding at a rate of more than 5%--after growing at an astonishing 7% pace at the end of last year. In 1994, when Greenspan & Co. intervened with higher rates, it was only 4%. And while the recent BLS jobs number pointed to a slowdown, some Fed insiders worry that the sizable drop in the creation of new jobs in May could reflect undercounts of graduating students who landed summer jobs or seasonable adjustment problems caused by a mild winter and cool spring. To be sure, there are hints that the economy is dialing back. The National Association of Purchasing Management's factory index showed slower growth in May than April, and new-home sales dipped recently. But a decline to levels that would, at any other time, be considered vibrant isn't enough for the Fed. And while experts expect the June 13 retail sales report to suggest slow spending, many believe it is a temporary blip. ''One could end up with a slow quarter, as we have seen in the past, followed by a resumption of considerable strength,'' warns San Francisco Fed President Robert T. Parry. So beware of market euphoria that the Fed has already played its hand. Conceivably, the central bank could bump rates upward again as soon as June 28. More likely, a cautious Greenspan will take a breather until the bank's Aug. 22 meeting when a 25 basis point hike seems probable. By then, the Fed will have had a chance to digest two more employment reports and several rounds of inflation and retail sales figures. Greenspan may provide a hint on June 13 at a speech to the New York chapter of the National Association for Business Economics. While Greenspan successfully engineered a soft landing in 1994, his task is a lot harder now. Productivity boosts have sent the Y2K economy soaring into uncharted waters--but even Greenspan, a high priest of the New Economy, doubts that current growth rates are sustainable. So unless the numbers pointing to a slowdown get more credible, the Fed's tightening binge isn't over yet. By Laura Cohn and Rich Miller Cohn and Miller cover the Fed from Washington. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Unsinkable Consumer CHART: Incomes Are Rising... CHART: ...Stocks Are Rebounding... CHART: ...And Confidence Is High Commentary: Greenspan Hasn't Brought This Baby Down Yet INTERACT E-Mail to Business Week Online

Copyright 2000-2009, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice