The Federal Reserve Board's decision to hike interest rates a quarter point, with more hikes anticipated later this spring, is perverse. The economy is finally growing at a decent clip, ordinary people are getting glimmerings of wage increases and Chairman Alan Greenspan feels compelled to slam on the brakes.

The Fed's senior staff, even more inflation-phobic than Greenspan, has spent the past several months scouring the economic indicators for some small hint of escalating inflation, to justify a rate increase. But they couldn't find any. Inflation actually declined in the first two months of 1997, to an annual rate of 2.3 percent from 3.3 percent in 1996.

Even Greenspan, in his Joint Economic Committee testimony, said recent slight wage gains had not affected underlying inflation, and that "faster productivity growth last year offset the pressure from rising compensation gains."

That, if anything, was an understatement. During 1996, productivity increased by 1.2 percent, while real wages went up by only 0.5 percent. Greenspan himself has repeatedly said that the actual growth of productivity is understated by the statistics.

So why the rate hike?

Greenspan and his colleagues offer a startlingly new rationale a preemptive strike against price pressures that do not yet exist. Though there is no evidence of rising inflation, we have to act because inflation might be around the corner. Depressingly, this has become conventional wisdom.

A second explanation is that Greenspan acted out of his repeated concern that the stock market is overvalued. Higher interest rates cool the stock market by coaxing investors out of stocks and into money market funds. And by raising the cost of borrowing, slowing economic growth and industry's profitability higher rates further dampen the stock boom.

But if that is the real goal, there are better ways to cool the stock market without damaging the real economy. Greenspan, who is never shy about making policy recommendations, might have thrown some useful cold water on the proposed capital gains tax cut. That would dampen market euphoria. Or he might have put in a kind word for the idea of a small tax on financial transactions, to discourage speculative stock trades.

But instead of acting to temper the speculation, the Fed moved to throttle the real economy. Unfortunately, Chairman Greenspan has taken on the role of infallible deity.

This is a pity, since there ought to be a real debate about how fast the economy can grow, and why the average working family is not sharing in the economy's productivity gains. If the Fed slams on the brakes whenever growth hits 2.5 percent or so, that debate is moot. The economy grew at nearly twice that rate in the two decades after World War II, and could again.


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