Newspaper article The Christian Science Monitor

Markets May Have Misread Greenspan

Newspaper article The Christian Science Monitor

Markets May Have Misread Greenspan

Article excerpt

Millions of investors pumped money into stocks last Tuesday on the supposition that Federal Reserve Chairman Alan Greenspan had hinted at lower interest rates.

The market scored some of its best one-day point gains in history.

Economist Alan Meltzer says these investors are all wrong.

What Mr. Greenspan actually said, maintains the Carnegie Mellon University professor, was that the Fed has moved to a neutral monetary policy stance from the bias toward a tighter policy it has had since last spring. So a cut in interest rates is now as likely as a raise in rates.

Fed policy, of course, is of interest not only to investors but to consumers thinking of car loans, mortgages, or other debts.

Greenspan also reaffirmed that since the Fed is the "lender of last resort," it would not allow the nation's economy or financial system to collapse. But that's not new, the Pittsburgh economist notes.

As usual, Greenspan spoke in "Fed-speak," with words that are ambiguous.

Mr. Meltzer has a special status as a Fed-watcher. He has been studying monetary policy since 1961. He ranks up there in reputation in the academic community with Nobel Prize-winning economist Milton Friedman as an expert in monetary affairs.

He is also founder and head of the Shadow Open Market Committee (SOMC), a group of academic and business economists that meet semiannually to comment on current monetary policies and propose alternatives.

That group is influential. Its views usually get press coverage. Two former members are today presidents of Fed branches - Jerry Jordan in Cleveland and William Poole in St. Louis. They thus help make monetary policy.

The SOMC, currently six economists-strong, holds a meeting in Washington today. It is the 25th anniversary of its first meeting, held in New York. This writer covered that session.

At that time, SOMC policies were economic heresy. Its "monetarist" members regarded growth in the nation's money supply as more important than interest rates in determining inflation and the business cycle. …

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