Visualize the following scene:
A pilot is at the controls of her new jetliner. Digital displays show a wealth of information: altitude, course, air speed, latitude and longitude, engine rpms, exhaust gas temperature and other data.
The pilot knows exactly where she is, where she is going, and how soon she will get there. She has dozens of controls at her fingertips that allow her to make any precise changes she wants.
Now visualize a second scene. A private eye is leaving her office. Just as she opens her car door, two goons mug her, grab her keys and stuff her in the trunk of her own automobile. The goons jump in front and drive away.
The private eye is still groggy from the struggle, and there isn’t much room because the trunk is jammed with bags of clothes she had been meaning to leave at Goodwill. But she is resourceful, and she pays attention to every clue as to where the two goons are taking her.
Despite the muffling effect of the clothes, she can hear the sound of the tires on the pavement, the rumble from the hole in the muffler she meant to get fixed and the whine that the transmission makes in fourth gear. Since the shocks are also bad, she can feel a little lurch when the car goes around corners or over railroad tracks.
She has a rough idea of the ground they have covered so far. But she doesn’t have a clue as to where she is being taken. She begins to feel around. Her fingers find a rust hole in the floor pan of the trunk. Through it she can just grasp the emergency brake cable. She realizes that if she suddenly pulls it hard enough, she may be able to halt the car. But where will it stop and how will the two thugs react if she does so?
Which of these two scenes provides the better analogy for the situation that Alan Greenspan and the other members of the Federal Open-Market Committee face as they prepare for this week’s meeting on U.S. monetary policy?
Many people, especially those who learned economics from the hyper-Keynsian textbooks popular in the 1960s and 1970s, apparently believe that FOMC members are like the pilot. They have a wealth of accurate, up-to-date information and many direct, reliable controls at their fingertips.
The reality, as experienced policy makers know, is much more like the private eye’s situation. They have only a vague idea of where they are, even less information about where they are going, and only one crude control at hand, the effects of which are hard to predict.
Just as the private eye in the trunk gets some hint that her car is slowing when deceleration lurches her against the back seat, and she hears the exhaust leak burble with a downshift, the FOMC has some evidence that the U.S. economy is slowing. Last week, the government released reports on May that gave some indication of tight labor markets easing. This included a slight uptick in the national unemployment rate to 4.1 percent from 3.9 percent in April.
The number of employed individuals dropped somewhat, as did the total labor force. Furthermore, the report on prices showed a somewhat smaller-than-expected increase in consumer prices with the not-seasonally-adjusted index up only 0.1, from 171.2 to 171.3 on a scale where 100 equals prices in 1982-84. While every commentator noted that the price survey was carried out so early in May that it did not pick up gas price increases later in the month, the CPI numbers by themselves show little inflation.
The Fed’s own Beige Book report issued Wednesday, June 14, reported that “solid economic growth continued in April and May, but that signs of some slowing from the rapid pace earlier in the year are also present.”
In Minneapolis, “economic activity remains hot,” and in Chicago and Richmond, VA, growth is said to be strong. Most of the other district reports characterize growth as moderate or steady. All but Minneapolis said scattered signs of cooling are in evidence or the pace of growth is slowing. Indications of worsening price inflation, while not widespread, are reported by several Districts.
Well, what is a policy-maker to decide from all of this, particularly if the policies you have the power to act on usually only take effect from 6 to 18 months after any change? I don’t think that anyone has a clear answer as to what the FOMC will do on Tuesday and Wednesday.
Several key members, notably governor Lawrence Meyer, apparently believe that inflation is still a danger and that the Fed should further tighten the money supply.
But other members may wish to pause while the effects of previous tightening begin to work and while the collateral effects on the economy of recent oil price increases become more evident. Moreover, the Fed historically exercises more caution in either tightening or loosening monetary policy in the immediate run-up to a presidential election to avoid charges that it favors one candidate or another.
So it is anyone’s guess what decision will be announced to the press this week. Despite much hand wringing over gasoline prices, the U.S. economy remains in a very favorable position for most households. Economic activity may slow by its own volition or as a result of Federal Reserve tightening, but most households are better off than they were two, five or 10 years ago.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.