The substance, tenor and tone of Alan Greenspan's Humphrey-Hawkins testimony yesterday at House Banking were more discouraging than ever -- as bad on second and third readings as it first seemed. We cannot even blame his posture on a stratagem to co-opt those factions of the FOMC that are even more rabidly growth-phobic than he is in order to keep market yields from falling, yet maintain a consensus for a "neutral" stance. If Greenspan had been maneuvering to placate the disparate elements of the FOMC, the June 30 rate hike probably would have done the job. There would have been no need for him to sustain the ploy; certainly not to up the pitch of his hawkish rhetoric yesterday. We are also not persuaded by the relatively sunny interpretation in today's Wall Street Journal that "the Fed isn't locked into further interest-rate increases and instead suggested it will wait for more signs of inflationary pressures before moving to slow the economy."
The flaw in that reasoning is that the "signs" for which Greenspan is on the lookout equate the risk of inflationary "overheating" with further labor market tightening. The fact that current employment growth exceeds growth of the working-age population "implies that real GDP is growing faster than its potential," Greenspan testified. "There can be little doubt that, if the pool of job seekers shrinks sufficiently, upward pressure on wage costs are inevitable." This has "invariably presaged rising inflation in the past," he asserted, "and presumably would in the future." Actually, history demonstrates that rising unit labor costs are far more likely to result from a Fed-induced slowdown in real output, and then only "invariably" lead to inflation when subsequently accommodated by the central bank. That, it appears, is the direction Greenspan is headed.
There were no bright spots in the rest of his testimony, as we usually find. When Chairman Jim Leach, from the battered farm state of Iowa, asked him if the Fed would be as "vigilant in combating deflation as it has been vigilant in fighting inflation," noting "there is real deflation in aspects of agricultural policy," Greenspan simply said he surely would do so. Leach, who has been eating out of Greenspan's hand since he became chairman in 1995, had no follow-up except "Thank you." In response to a question about the devastating impact of the appreciating dollar on foreign currencies in the developing world, Greenspan essentially said: "That's their tough luck. They don't have to peg their currency to the dollar." And with the Republicans in the struggle of the year with President Clinton and the Democrats on tax cuts, Greenspan practically invited Republicans to break ranks with their leadership and join the Democrats in using all the budget "surplus" for debt reduction. In other words, the man Ronald Reagan appointed chairman in 1987 joined in every particular with the philosophy of the austerity Democrats. At 6% today, with budget surpluses as far as the eye can see, the 30-year Treasury bond is higher than the 5.78% of September 1993, then back when the official projections were of deficits as far as the eye could see. With the GOP front-runner George W. Bush already signaling his eagerness to have Greenspan reappointed chairman as soon as possible, there is no reason for us to expect any improvement from the Fed chairman from now on. He sees the future in the firm grip of the Political Establishment and is making his bed accordingly.
One bright spot: Thanks to a slick maneuver by the House GOP leadership that gave a figleaf of old-fashioned "fiscal responsibility" to the rebellious "moderates," the Ways&Means $792 billion tax cut (over 10 years) squeaked through yesterday. The path toward a tax cut continues to suggest a presidential veto and a second round of negotiations that will lead to a bipartisan bill that will contain positive growth elements.