It's hard to believe that only a few weeks ago many of Alan Greenspan's colleagues were leaning toward a hike in short-term interest rates. That was neo-1929 thinking.
Rising interest, of course, makes the average American's consumer debt a bigger burden, shrinks housing sales and new construction, curbs retail buying, and eventually slows job growth. It would also cut back buying of Asian and Latin American exports. And that would further curb buying of US exports, adding to job worries.
Despite the leaning toward higher rates by some Fed officials, the US central bank has outwardly stayed neutral. It has neither raised nor lowered rates for 17 months.
Now it's time to push the national accelerator. Greenspan & Co. ought to lower short-term interest rates by a noticeable half percentage point. They should do so to stave off the stalling effects of what has been in effect a hidden interest rate rise over the past couple of years.
Stalling? Hidden rate rise?
We know it's hard to envision stalling in an economy that grew 5.6 percent in the first quarter of this year, paused at an idling 1.6 percent during the GM strike and widespread inventory reductions, but is still forecast to grow about 3 percent for the year.
Look, however, beyond US borders. Asian, Latin American, and other developing world buyers are purchasing declining amounts of US-produced goods. American consumers are buying more imported competitors to US products. Both are recipes for economic slowdown. It's not too late to counteract that. But doing so becomes increasingly difficult as more emerging nations feel the domino effect.
All right. But what's the "hidden rate rise?" Aren't interest rates dropping?
Yes. But that's long-term rates. Fed-controlled short-term rates have been holding steady at 5.5 percent while inflation has been shrinking in recent years. And that amounts to a rise in real rates - the interest you actually pay after inflation is subtracted. So real interest is considerably higher than it was earlier in the decade.
Next question: Didn't you say some of Mr. Greenspan's colleagues have wanted to raise rates to head off future inflation? Couldn't they be right?
Fed inflation hawks could be right. But, empirically, that seems less likely in view of the competitive effects from falling economies abroad. Plus the pragmatic evidence of a consumer price index that refuses to rise despite many months of warnings from inflation hawks.
One of the principal arguments for a jump in inflation has been that unemployment is lower than it's been for a generation, and competition to fill jobs is bringing higher pay. But as the baby boom matures, skill levels generally go up, and welcome productivity gains offset welcome pay hikes. So, no inflation stimulus there. And still none in sight, as overseas competition waylays sticker prices. (Health care college tuitions, and some kinds of near monopoly services such as cable TV are worrisome. But falling commodity prices, like gasoline and heating oil, hold the inflation index down.)
The Fed governors' steadfast war on inflation under chairmen Volcker and Greenspan was a memorable victory. That war is won for now. It's time, at next month's Fed open market meeting, to help the US, and indeed the world, win the next war.
Remember, this is the case where lifting all boats requires lowering rates.