Some of the best economic data in memory, plus Federal Reserve chairman Alan Greenspan's hint that short-term interest rates may stay at present levels or even go down a fraction, has propelled Wall Streets' Dow Jones average above the 4000 level for the first time in history. That the stock market reached so high despite the Fed's doubling of short-term interest rates during the past year represents a triumph for Greenspan economics.
Despite repeated warnings from Maryland's Sen. Paul S. Sarbanes and other critics that the nation's chief central banker was short-circuiting the economy, Mr. Greenspan's sound monetary policies worked. Growth rates expanded at a torrid 4 percent in 1994 while unemployment dropped and inflation was contained nicely.
To be sure, Mr. Greenspan's limited austerity did not work out precisely as planned. He had hoped that by moving up short-term interest rates to 6 percent from 3 percent incrementally, financial circles would be convinced he had matters so under control that long-term rates would drop. Instead, they shot up from just below 7 percent last February to more than 8 percent before easing to about 7.5 percent. Why he did not act more in keeping with his "preemptive strike" rhetoric with early, jolting boosts in short-term rates drew an answer in House hearings. Mr. Greenspan said he feared such tough action would have so "destabilized the markets" as to wreck his other objectives.
Because the stock market is a contrary institution, seeming to rise on bad news and falling on good, is yesterday's breakthrough a bad omen? Not in our view. The projected decline from 4 percent to 2.5 percent in GDP this year puts the economy on course for a prolonged recovery with stable prices. Investor confidence is chasing bears from the bond market and setting stock bulls in motion.
Another favorable factor is the Washington consensus for cutting federal spending. Mr. Greenspan, the conservative money meister, sides with Republicans in hacking deeply and with Democrats in using savings for deficit reduction rather than for tax cuts he considers unnecessary. The Fed chief also questions how a Balanced Budget Amendment can be enforced, favors requirements for 60 percent majorities in passing spending bills and even supports a return to the gold standard.
Although there is no need to swallow the Greenspan approach whole, Congress and the White House should listen when the Fed chairman speaks. After all, he has more economic clout than any other official in Washington -- including the president -- and his track record is pretty good. With world financial markets in turmoil, as the Mexican financial crisis so vividly demonstrates, sound monetary policy in Washington is a vital ingredient of American global leadership.
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