Asia Times: US Fed: Outlook ''symmetrical''



	November 20, 1999	atimes.com

Editorials

US Fed: Outlook 'symmetrical' - or cross-eyed?

The US Federal Reserve raised interest rates for the third time this year last Tuesday thus undoing the three emergency rate drops it had engineered in response to the fall 1998 world-wide liquidity squeeze caused by the Russian debt crisis. After a lengthy policy-making session the Federal Open Market Committee also said its near-term outlook now was ''symmetrical'' - which for some reason or other means that it is more inclined to leave rates alone in coming weeks than to change them.

Global equity markets with New York in the lead rallied on the rate rise. Perhaps they liked the Fed's ''symmetry''. But more likely, they simply - at this stage - are more interested in what happens to Microsoft than in FOMC members' obsessive concerns over non-existent inflation.

That there is no inflation to speak of in the US economy was confirmed once again on Wednesday when the Labor Department said that the consumer price index rose 0.2 percent last month for a four-month low, after rising 0.4 percent in September. The October CPI was 2.6 percent higher compared with the same month a year ago. The core CPI (not including food and energy prices) was 2.1 percent higher than in October 1998. That's close to August's 1.9 percent for the core rate - a 33-year low. And all this while the economy is humming along at nearly 5 percent growth pace and unemployment is at a three-decade low (4.1 percent).

So, why is the Fed looking cross-eyed at the economy and raising rates though it itself admits that ''cost pressures appear generally contained''? Most unfortunately, though chairman Alan Greenspan now has come around to Bill Gates's view that Internet economy productivity gains are here to stay, a majority of FOMC members still haven't shaken the belief that economic growth causes inflation and thus must be curtailed. That old-time Phillips Curve religion once again sneaks into the Fed's Tuesday statement with the complaint that despite interest rate increases in June and August there was only ''tentative evidence of a slowing'' in economic activity and that - what a pity! - industrial production jumped a higher than expected 0.7 percent in October.

Give it up, guys. Target inflation in your policy-making; that's your job. But don't target economic growth. It's not the enemy.

One apparent enemy of continued healthy US growth is the burgeoning trade deficit. It rose to $24.41 billion in September from $23.55 billion in August, but was just below the record $24.89 billion deficit set in July. The deficit with China recorded an all-time high of $6.9 billion. With such figures, the US is on target for a $300 billion deficit for the year as a whole. Traditional economists say this is unsustainable; something must give; the dollar will fall; there might be a flight from dollar-denominated assets.

Such worries are more rational than the Fed's. But again its that amazing US economy itself that's proving theoretical worries wrong. The trade deficit is more than offset by capital inflows which totaled well over $500 billion in the first half of the year alone and with no evidence of a let-up - and most importantly, much of that capital inflow is in the form of foreign direct investment. The US is buying foreign consumer goods; foreigners are buying US companies and technology. Nothing wrong with any of that. So, not just the Fed, but also the Commerce Department should stop fretting and have a good hard think about old policy assumptions no longer applicable to the new economy.