Outlook: US inflation
Thursday 17 June 1999
ALAN GREENSPAN, chairman of the Federal Reserve, is testifying before a Congressional Committee today. As ever, his comments are as eagerly awaited by the markets as the new Star Wars movie. Famous for the obscurity of his pronouncements, here is what the Fed Chairman might say if he felt like making his views on the danger of inflation - The Phantom Menace - a little clearer than usual.
"We had figures yesterday showing there was no rise in consumer prices in May. I have to admit I was as surprised as all those Wall Street pundits, after April's big jump. The US economy has been growing above and beyond any sustainable rate for longer than anybody on the Street can remember. Inflation is sure to take off eventually. It is only a question of when.
"Now if I were to be true to my credentials as a central banker, I would be bound to raise interest rates now. I should have done it already. Both the overvaluation of share prices and the yawning US trade deficit are clear signs of inflationary pressure in the economy. The current account is unsustainable and the dollar will fall sooner or later, probably very sharply, bringing fresh inflationary impulses in its wake.
"The respectable excuse I have for not having done more than shift to a tightening bias is that the bond market has done part of the Fed's work. Long term yields have climbed already. Our ability to manipulate the long end of the market in this way explains how the Fed gets away with being so much less activist than other central banks.
"I have to confess, though, I also enjoy my reputation for having masterminded America's long boom not to mention the greatest bull market of all time. Do I want to burst the balloon? Absolutely not. For, as I keep saying in my speeches, we in the US are genuinely at the forefront of dramatic technological changes which are boosting productivity and profits to an unexpected degree. As I said, the combination of fast growth and slow inflation cannot last for ever. But luckily it has not come to an end this month. The bears are going to have to wait a while longer yet for me to wield the big pin."
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