The sublime art of ambiguity
US CENTRAL BANK POLICY
FEW central bankers have perfected the art of constructive ambiguity as comprehensively as Alan Greenspan, chairman of the US Federal Reserve.
Just when watchful investors think he has said something genuinely conclusive about the direction of monetary policy, he reverses himself in the very next paragraph. Tuesday's performance before the Senate banking committee was an example.
Once again the Fed chairman suggested that although the US economy had achieved some substantial structural gains in the last few years, talk of the death of inflation was premature. He warned that while the economy had slowed since the start of the year, price pressures from the powerful domestic momentum were still considerable.
The message overall was somewhat more hawkish on inflation than in the chairman's last big statement before Congress last month. Four times in the space of 30 minutes, Greenspan said more or less directly that the US central bank could be forced to raise interest rates. Though he acknowledged the economy was still steering uncertainly between the Scylla of an acceleration in domestic inflationary pressures and the Charybdis of an Asian-induced slowdown, the Fed's open market committee believed "the potential for accelerating inflation is probably greater than the risk of protracted, excessive weakness in the economy".
Most economists were expecting a more even-handed assessment of the risks facing the US. After a remarkably robust start to the year, much has been made of the sharp slowdown in growth in the second quarter. A number of analysts believe growth will continue to be moderate for the rest of the year, and may even tip into recession next year.
But Greenspan was sceptical of the notion of a dramatic slowdown. He pointed out that the deceleration - from 5.4% GDP growth in the first quarter to close to zero in the second - was driven by several special factors, including a sharp slowing in inventory growth and the General Motors strike.
The Fed's forecast for the full year - growth of between 3% and 3.25% in 1998 - suggests the central bank expects the economy to return to a solid rate of growth in the next few months.
The reason, Greenspan said, was the continuing "virtuous cycle" of high-productivity, low-inflationary growth which had bolstered confidence in securities markets, improving consumer and business confidence and leading to higher investment and consumption.
The factor that most threatened to break this cycle, he said, was not the external shock from Asia - though he acknowledged that the problems there had clearly slowed the pace of US expansion - but the increasing strains on US labour markets.
Returning to a now familiar theme, the Fed chairman warned that the US was still running out of available workers.
"It is the balance of supply and demand in labour and product markets in the US that will have the greatest effect on inflation rates here." Labour supply - from new entrants, such as younger workers, ex-welfare recipients and immigrants - has been increasing by about 1% per year recently. But employment - demand for labour - is rising by 2% a year. The gap has been filled by record participation rates - the proportion of the population that works - and by a sharp decline in unemployment, to last month's 4.5%. Both factors are likely to push up wage costs over time.
For that to be avoided, one or more of the following would have to happen:
But the alternative was policy: "Failing that, firming actions on the part of the Federal Reserve may be necessary to ensure a track of expansion that is capable of being sustained." - Financial Times.