Now is not the time for a preemptive strike against inflation.
Back in mid-June, Wayne Angell and Lawrence Lindsey, the most hawkish members of the Federal Reserve Board, spoke out about the dangers of a resurgence of inflation, and a substantial part of the credit markets jumped to the conclusion that the Fed might raise interest rates.
If ever there was an idea whose time has not yet arrived, tightening monetary policy right now is it. Last week's economic statistics were unremittingly disappointing on Tuesday, Wednesday, Thursday, and Friday, and they provided no evidence that prices might begin to rise faster.
The index of leading economic indicators was supposed to be unchanged for May, but it declined 0.8%. The consumer confidence index for June was expected to rebound, but it dropped again. New single-family home sales for May were expected to total about 675,000, but they came in at 571,000.
Factory orders were expected to show a 1% increase for May, but they declined 1.4%. Construction spending was predicted to rise at least 0.7% in May, but it moved up only 0.5%. Nonfarm payrolls, which expanded 216.000 in April and 209,000 in May, were expected to increase 130,000 to 150,000 in May, but they eked out a gain of only 13.000. The June unemployment rate, which had been expected to remain unchanged at 6.9%. rose to 7.0%.
Back in mid-June before last week's gloomy numbers were released, Gov. Lindsey of the Fed said in a television interview that he thought inflation was "going the wrong way." He predicted that the inflation rate this year would be 4%, not the 2.7% he had been expecting. And his colleague gave a speech in Switzerland and said that inflation was still too high and the central bank ought to be aiming for zero inflation.
Suddenly, the credit markets were full of talk about a preemptive move toward restraint to show everyone that the folks down at the Fed were still serious inflation fighters. Something to shore up their credibility, and so forth.
As Henry Kaufman, the wise Wall Street economist remarked at a Senate hearing last Thursday, conditioning monetary policy on something as ill-defined as the notion of "credibility" has an "unfortunate tone of self-righteousness rather than a firm analytical grounding."
The credit markets don't require assurance that the Fed is steadfast. Its steadfastness isn't being questioned so much as its current analysis of inflation and its judgment. As Dr. Strangelove made clear, preemptive strikes are daft.