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Roger Ferguson

Roger Ferguson

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Editor's note: The following editorial ran on Dec.

9, 2003, under the headline "Speed Demons at the Fed." The editorial was criticized the same day in remarks by Ben Bernanke, who was then a Federal Reserve Governor, at a meeting of the Fed's Open Market Committee.


Bernanke's comments, which were recently released by the Fed, and a related editorial appear nearby.

If Federal Reserve Board members were Nascar drivers, their motto might be, "Look, Ma, no hands." The economy has begun to speed along, and some key price signals are raising the yellow flag, but the Federal Open Market Committee, which meets today, refuses to put its hands on the steering wheel, much less its foot on the monetary brake.The governors have leaked that they aren't likely to tighten what may be the most accommodative monetary policy since Arthur Burns roamed Fed hallways in the 1970s.

The fed-funds rate will apparently remain at 1% "for a considerable period," as the Fed language of recent months puts it.

Certainly no one can accuse Chairman Alan Greenspan of stealing the economic punch bowl.The concern we and others have is precisely the opposite -- whether the Fed is paying adequate attention to those yellow-flashing price signals.

Gold closed above $406 yesterday and commodity prices in general are up nearly 30% this year.

The dollar is weak across the board and continues to hit new lows against the euro almost daily.

Dollar weakness in turn induced OPEC last week to float the prospect of raising the price of oil, which trades in dollars and is already around $31 a barrel.OPEC's chatter gave those of us who remember the 1970s a jolt, because the cartel first came to global prominence after Richard Nixon broke free from the Bretton Woods monetary system and the world embarked on its last great inflation.

Rising oil prices then were a result of dollar inflation, not its cause.We're willing to stipulate that Mr.

Greenspan wants no return to the 1970s.

After Paul Volcker, no one has done more over the years to reduce inflation expectations to their recent low ebb than the current Fed Chairman.

Core inflation also remains low, though it has climbed about one percentage point this year and the consumer-price index is always a lagging indicator.We get worried, however, when Fed Governors begin to say that their days of fighting inflation are over.

Fed Vice Chairman Roger Ferguson has been declaring the monetary equivalent of "mission accomplished" wherever he goes, most recently in a November 21 Chicago speech.

"Inflation still seems more likely to move lower than to increase," Mr.

Ferguson averred, making us wonder what prices he has been watching.Perhaps none.


Ferguson and Fed Governor Ben Bernanke seem preoccupied instead with productivity growth and what they call "the output gap." The former has been growing rapidly -- if you believe we really know how to measure such things -- and the Fed argument is that rapidly rising productivity allows for easier monetary policy for a longer period.

If these productivity gains continue once companies begin to hire more workers, then perhaps this will be a correct judgment.

But that's a long way from certain.As for the "output gap," this refers to the difference between actual GDP growth and the level of "potential output." Well, third-quarter growth of 8.2% isn't chopped liver, and most every forecaster now expects 4% in the current quarter extending into next year.

Fiscal policy in the form of the Bush tax cuts is also helping to spur growth, and will continue to do so next year, contrary to Democratic-Keynesian predictions that it would be a one-time boost last summer.In any event, the Fed's main obligation is maintaining stable prices.

That means paying attention to what have historically been the best indicators of future inflation -- such as a rising price of gold and commodities, and a falling dollar.

The greenback warrants special Fed attention because the world clearly believes that the Bush Treasury (its protestations aside) prefers a cheaper currency.Traders are betting on that prospect every day, and the danger is that a falling dollar becomes a rapid self-fulfilling prophecy.

A run on the dollar could require the Fed to lift rates abruptly and stop the current recovery in its tracks.

Short of a crisis, a resurgence of inflation even to 3% or 4% could lead to higher interest rates next year and beyond and slow growth into 2005 and 2006.A sign from the Fed today that it is mindful once again of inflationary risks would reassure investors that the speed demons at least have their hands on the wheel.Printed in The Wall Street Journal, page A15
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