WASHINGTON -- With the U.S. economy thriving, high-flying stock prices leveling off a bit and the risk of higher inflation still moderate, the last thing Federal Reserve Chairman Alan Greenspan wants to do is rock the boat.
He appeared to have succeeded in that goal when he gave a keenly awaited speech to a US business group in Florida on Thursday. Greenspan's suggestion that the Fed is not planning a series of aggressive interest rate rises prompted financial markets around the globe to rally on Friday.
But while Greenspan -- the most circumspect and evenhanded of that ever-elusive brand of economists, the central banker -- laced his words with caution, his basic message may just have been drowned out by that roar of jubilation: A small rate rise is still on the table when the Fed meets next month.
Greenspan offered enough cautionary words about the tight U.S. labor market and the need for an economic slowing that few on Wall Street would be shocked if he decided to raise short-term rates at the Fed's Nov. 16 policy meeting.
What some in financial markets read as a kind of feel-good speech by the world's most powerful central banker, did in fact contain a number of subtle, and not-so-subtle, warnings. Taken together, they left little doubt about Greenspan's intentions.
There was the warning that productivity, which has helped to keep a lid on price and wage inflation, cannot continue to rise indefinitely. There was talk about "market pressures," "unsustainable growth," and "inflationary imbalances."
And then there was this line: "(The) scenario of rising cost and price pressure is one policymakers have dealt with before, and the actions called for, while by no means easy, are readily discernible."
In other words: If there is even the slightest indication that inflation is on the rise, we know exactly what to do -- raise rates to slow the economy to a more sustainable pace.
"This would be the time to put the restraint in place, while both the markets and the economy can withstand it," said Lynn Reaser, chief economist at Bank of America Private Bank in Jacksonville, Fla.
A Reuters poll on Friday showed 18 out of 30 Wall Street investment firms agreed, predicting the Fed will nudge up short-term interest rates by a quarter of a percentage point next month. That would be the third such move this year.
After all, the economy is growing at a red-hot pace that few economists, including those at the Fed, think can be sustained forever. According to preliminary data, it expanded by a fiery 4.8 percent in the third quarter of the year.
While inflation has so far shown few signs of picking up, the Fed's prime worry is that the nation's tight labor market might prompt wages and prices to rise in the future.
Productivity gains have so far prevented that, but nobody, not even Greenspan, knows how long that trend will last.
"When a Fed Chairman is uncertain, he tends to err on the side of caution," said Joel Naroff, who runs his own economic advisory firm in Holland, Pa. "That means that rates will probably be increased on November 16th."
Greenspan did acknowledge that recent increases in market interest rates -- rates of return offered on US government and other forms of debt -- had done some of the Fed's work of slowing the economy. But he also wondered how much of an effect that would have on future demand.
While a few areas of the economy -- notably the housing sector -- have cooled off in response to higher rates, there is little evidence yet that this is happening on a broad scale.
Should the Fed decide to raise rates and dampen the festive mood, US consumers will have no-one to blame but themselves.
"The US consumer still looks like an 800-pound gorilla who is very enthusiastic and ready to spend," said Reaser, referring to furious consumer spending that accounts for two-thirds of the $8.5 trillion US economy.
As always, Greenspan's warning comes with a disclaimer -- should the economic data coming out between now and 16 November convince him that all is well in the world's biggest economy, he may decide to hold off on a rate rise for a while.
Some say that if the Fed does decide to stand pat then it might wait until next year to sit out any distorting effects the Year 2000 computer bug might cause to the economy.
"If they don't raise rates now, you've got to think whether they will be back early next year," said Stuart Hoffman, chief economist at PNC Bank Corp in Pittsburgh, Pa.
Copyright 1999 Reuters Limited.
