Businessweek Archives

Let The Economy Keep Cruising


Editorials

LET THE ECONOMY KEEP CRUISING

History shows that it's all too easy for Federal Reserve policymakers to stumble when the ground shifts under their feet. After the oil price shock of the 1970s, the Fed ran an excessively loose monetary policy, allowing inflation to entrench itself. And too-tight monetary policy in the early 1930s was the main reason why the Great Crash of 1929 turned into the Depression.

The U.S. economy seems to be passing through yet another watershed period now--and so far, Alan Greenspan appears to be doing a better balancing act than many of his predecessors. For now, he sees no reason to raise rates, and rightfully so. Greenspan clearly accepts the reality of the New Economy: the combination of technology, globalization, and other forces that allow low unemployment and strong profits to coexist with low inflation. In his Humphrey-Hawkins testimony to Congress on July 22 and 23, Greenspan noted growing evidence of what he called "basic improvements in the longer-term efficiency of our economy." Additional support for this view could come on July 31, when the official government statistics probably will be revised to show faster productivity growth in recent years (page 25).

The Fed's next move depends on how the economy does in the rest of 1997. If growth is too strong, or if inflation picks up, Greenspan will be quick to argue for higher rates. If growth slows to a 2% to 2.5% rate in the second half as the Fed and most forecasters project, some may argue that rates should decline. Our own view is that the economy can and will grow closer to a 3% rate in the second half--and that productivity gains will continue to keep inflation in check. Greenspan will probably sit tight the rest of the year, and that's fine with us.


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus