Memo To: Website browsers, fans, clients
From: Jude Wanniski
Re: Too many people working?
Jack Kemp, co-director of Empower America, sent the following letter to Fed Chairman Alan Greenspan on April 29, after reading the WSJournal story about the Fed shifting from a neutral posture to one that tilted toward higher interest rates. The story itself caused a sensation on Wall Street, with the Dow Jones Industrial Average falling more than 200 points. The letter is now in public circulation, so we post it here for your interest and information:
The Honorable Alan Greenspan
Chairman, Board of Governors
The Federal Reserve System
20th and C Streets, NW
Washington, DC 20551
Dear Mr. Chairman:
When I last wrote you in January, I congratulated you on a great speech to the American Economic Association in which you buried the tired old idea of a Phillips curve trade-off between inflation and unemployment. In that letter, I also expressed my concern that monetary policy had been too restrictive since the Fed raised interest rates back in the Spring of 1997.
Since that time, during a period of virtual price stability, real interest rates have remained high by historical standards. The yield curve also remains flat relative to its historic shape. Commodity prices are well behaved, and there are no other early warning signals among financial indicators that incipient inflation might be threatening. The price of gold, although up from its recent low, remains below $320. Yet, there are selective leaks coming from inside the Fed revealing that the FOMC shifted from a neutral stance to a tightening bias in last month’s meeting because it fears rising asset prices and continued robust economic growth.
These leaks appear orchestrated to coincide with a coordinated attempt by some Fed Governors to “jawbone” markets into behaving in a way consistent with the misguided and discredited Phillips curve theory. The Wall Street Journal this week quoted Fed Governor Laurence Meyer as saying, “It is essential that the economy slow at this point, because it is already operating beyond its sustainable capacity and it has been growing above trend.” In the same article, the Journal cited Fed Governor Roger Ferguson lamenting the fact that the Asian financial crisis has not slowed U.S. economic growth and threatening that, “Either Asia will slow the [U.S.] economy to something that is more sustainable, or there may have to be some Fed action that will do that.”
Mr. Chairman, I am deeply concerned over the substance of the jawboning and appalled at the means by which it is being conducted. For Fed Governors to suggest that asset appreciation and low unemployment are inflationary is at odds with everything we have learned during the past 20 years. I know you agree with me, and it is particularly distressing to see this discredited and dangerous idea being promoted by use of selective leaks from inside the Fed.
I have always been for openness and transparency when it comes to powerful financial bureaucracies, whether it be the IMF or the Fed. In fact, I would be in favor of televising FOMC meetings so that markets could have the immediate benefit not only of knowing the Committee’s final decision but also knowing each Fed Governor’s position and their arguments supporting that position.
Information is the mother’s milk of free markets, and the faster markets become aware of shifts in monetary policy, the more efficiently they can adjust. I am, of course, aware of the Fed’s position that secrecy inside the Fed is necessary to encourage free and open debate among FOMC members. Although not totally comfortable with that position, I respect it and have been willing over the years to go along with a reasonable degree of secrecy, especially on your watch, since you, much more than your predecessors, have been so accommodating and cooperative in providing markets information on FOMC decisions with much greater dispatch. However, if other Fed members are going to abuse the privilege of the secrecy they are accorded by selectively leaking so-called confidential information in an effort to manipulate markets and wage a political campaign in the press to affect FOMC deliberations, I will find myself in the forefront of an effort to open Fed proceedings up entirely.
Finally, there have also been calls lately for monetary tightening from some of our Monetarist friends who are concerned that the money aggregates have been growing too rapidly. Granted, the aggregates have grown rapidly this year with the Monetary Base and M2 both reaching eight percent growth and M3 growth hitting 12 percent earlier this year. But in my opinion, rather than being a warning signal of incipient inflation, the growth of the monetary aggregates is indicative of a world-wide increase in the demand for the dollar. With robust, healthy economic growth continuing apace here in the United States and with increased demand for U.S. dollars in Asia, it is not at all surprising or worrisome that base-money growth increased to meet higher demand.
I close by referring back to your AEA speech in which you warned of the serious harm a persistent deflation does to an economy and how small the margin for error is in measuring a decline in the general price level once price stability is achieved. Given the situation in Asia, I must conclude that the greater danger at this time is for the Fed to err on the restrictive side, exacerbating the problems in Asia and possibly curtailing vibrant growth here at home. As I have said in many speeches over the years, inflation is not caused by too many people working. And, any misguided “preemptive strike” against inflation by intentionally slowing the economy will hurt most those on the bottom rungs of the economic ladder. I would welcome a free and open debate among Fed Governors on these vital issues.
Very sincerely yours,