After demure silence on the part of the Federal Reserve and benign neglect on the part of the Clinton administration, Washington officialdom is suddenly trying to jawbone a rise in the international value of the dollar. Why so? Because in the opinion of Fed chairman Alan Greenspan a further decline in the greenback could fuel inflation. Because in the opinion of Treasury Undersecretary Lawrence Summer the drooping dollar is a threat to global economic recovery.
Neither comment will be welcomed by liberal Democrats eager for economic stimulus from any source before the November elections. But the continued cooperation on monetary policy between the Fed and the administration should be reassuring not only to financial markets but to Americans eager for continued steady growth in a context of low unemployment and inflation rates.
Whether jawboning will be enough to bolster the dollar is a matter best left for the puzzlement of Wall Street analysts. Mr. Greenspan undoubtedly achieved his purpose in Senate testimony by encouraging speculation that the Fed may again raise short-term interest rates if the dollar decline adds to inflation pressures. Such money talk is preferable to another feckless attempt by the world's central banks to buy up dollars in a world where capital transfers exceed $1 trillion daily. We doubt Washington wants a surging dollar. It just wants to keep it steady at a level modestly favorable to U.S. exports and within a range to prevent sharp increases in the price of imports.
The end goal, both for the Fed and for the administration, is a decline in long-term interest rates that affect mortgages and business investment. Mr. Greenspan's 1 1/4 percent increase in short-term rates this year was intended to convince the financial markets that he had inflation under control and that long-term rates should logically moderate. But he himself now acknowledges he misinterpreted the market reaction to his switch away from the easy money policies that created red-hot 7 percent growth in 1993's final quarter. The result has been an increase in long-term rates that potentially could stifle the recovery unless vigorous action is take across the board to keep inflation flat.
So far, the Greenspan-Clinton policies remain more convincing than the liberal alternatives.