Fed needs an Angel(l)
President Clinton's 1994 monetary strategy is now clear: Short-term interest rates are to remain low, and the Fed is not to tighten. The White House is also making effective use of its Treasury Department proposal to bring under its wing a consolidated restructuring of the bank supervisory and regulatory agencies, including the Federal Reserve. The president clearly expressed support for the Democratic leadership view that monetary policy should concern itself less with inflation and more with economic growth.</br></br>Taking account of Chairman Alan Greenspan's spirited defense of Fed supervisory primacy on this page, as well as departing Fed Governor Wayne Angell's view that the dollar is too low and gold prices are too high, we see clearly that 1993's Fed-White House entente cordiale is now over. Fed Vice Chairman David Mullins finally ended a public argument with himself, indicating no need for an immediate increase in the Fed funds rate. It would appear that the central bank has capitulated to the White House, at least for now. This suggests there will be no preemptive strike by the monetary agency to head off rising inflation expectations.</br></br>That the White House has constructed an intricate web to ensnare the Fed is no particular surprise. From the beginning, this administration has articulated a fiscal-monetary mix of high tax rates and low interest rates, essentially arguing that the contractionary effects of rising tax burdens can be offset by the expansionist efforts of stepped up Fed dollar creation, thereby substituting more money to replace fewer goods. Pulled together by former Wall Streeter Robert Rubin, this policy approach is now paying off with the emergence of a very strong boomlet led by consumer demand.</br></br>Gold, however, is once again marching toward $400 an ounce, a signal of higher future inflation. Nevertheless consumer confidence and the president's poll ratings are substantially improving on the strength of the spending boom. The fine art of politics is always to focus on the short run, and Clintonites are successfully and determinedly refining this approach in a way not seen since Ronald Reagan's first team. They put to shame the amateurish Bushies who preceded them.</br></br>The Federal Reserve meanwhile has done itself very little good. Mr. Mullins, himself a Bush appointee, has been on all sides of the tightening debate. He initially noted that early warning inflation signals such as gold, commodity futures, and the weak dollar exchange rate suggested the need for harder money. Then, completely switching direction, Mr. Mullins fell back to defending the -- admittedly low -- 2.7% November inflation report. The trap, however, is that today's inflation is principally determined by monetary actions of at least a year ago. In other words, using current CPI reports amounts to driving while looking in the rear-view mirror.