WASHINGTON -- Bond market traders speculating that a downturn in global equity markets, particularly the Japanese market, might lead to another trim in interest rates should save their breath. It won't happen.
A Hallmark of the Federa Reserve under Alan Greenspan's leadership is a commitment to managing U.S. price stability with little thought about events overseas. Paul Volcker placed a great deal of emphasis on the value of the dollar as an international currency, but Mr. Greenspan is more interested in manufacturers' orders, consumer confidence, and other measures of economic activity at home.
Last week, Mr. Greenspan and his colleagues were reiterating, for those who would listen, the Fed's determination to head off sharper inflation and an accompanying rise in bond yields. They are still unhappy with the inflationary expectations that are built into the bond market and keeping rates high.
Accordingly, Fed officials are sticking to their belief that a mild recovery is in place that does not need any more stimulus from monetary policy, and some are already emphasizing that the central bank will have to hang tough after the November elections. They are bent on preserving and trying to improve on the hard-won gains in reducing inflation that have come with the recession.
For those who doubt this, listen to the words of Edward Kelley, a board member appointed by President Bush. "I believe that the challenge for the Federal Reserve in the upcoming period," he said, "will be to endeavor to ensure that we don't put conditions in place that enable inflation to resurrect itself."
The Greenspan Fed has a clear track record in reacting to international financial markets.
When the central bank eased rates in the aftermath of the 1987 stock market crash, liquidity in the U.S. financial system was in danger.
Then, in 1989, the Dow tumbled 190 points and Fed leaked to the Manual Johnson leaked to the press that the Fed was again willing to respond by easing. Mr. Greenspan disagreed, insisting there was no need to act because of a garden-variety market correction. The dispute contribute to Mr. Johnson's departure.
In his most recent congressional testimony on the subject, Mr. Greenspan maintained the Fed's move to ease rates on April 9 was not motivated by the drop in Tokyo stock prices. In fact, he insisted, Fed officials felt they had to delay acting because they did not want their action to be misinterpreted.
Moreover, the influence of Japanese financial markets on U.S. markets is a pale shadow of the past. Japanese institutions hold small positions here, and they have been unloading U.S. government securities for years, U.S. and Japanese markets are not directly linked, and the downturn in Japanese stocks represents a long-running unwinding from domestic problems that are out of reach for the U.S. central bank.
Meanwhile, the current drop in the U.S. stock market represents a correction from a period of euphoria created by repeatedly hitting new highs. Unless the shift takes on a meaner tone, with a hint of panic, it is an event of only passing interest to Fed officials.
Any more easing would have to be because of the economic data. Here, there is a case to be made. Housing permits have fallen three months in a row, retail sales show signs of fading, and exports are falling. Meanwhile, the job market remains weak and the unemployment rate high.
The money supply remains sluggish, but that is a phenomenon that has Fed policymakers puzzled more than troubled. They are considering new ways to measure money to take into account the flow of savings from banks to stock and bond funds.
More than ever, the Fed is being guided by the economic statistics. Because this month's beige book was generally positive in tone, with reports of improvement in most regions of the country, it will take a bunch of numbers in the other direction for officials to abandon their guarded optimism and trim rates.
Lower Japanese stock prices will not buy a cut in short-term U.S. rates. After all, Congress only got a quarter of a point on the budget agreement.