REVIEW & OUTLOOK (Editorial): Shock! Horrors!! Growth!!!
Financial markets are reeling from too much good news. On Wednesday the Commerce Department released its flash estimate putting second-quarter real growth at a snappy 5.7% annual rate, and also revised the first-quarter estimate upward nearly a full point, to a soaring 9.7%. Bonds sank. Equities plunged, then rebounded to end the day with a gain.</br></br>Are the markets afraid of growth? Isn't growth what we want? Why this confusion and turmoil? Yes, we agree, no one wants inflation, but inflation is not caused by growth. Inflation is too many dollars chasing too few goods, remember? And growth means more goods, remember? And just for the record, with the new growth figures naturally come new GNP deflators, showing inflation falling to a rate of 2.8% in the second quarter from 3.9% in the first.</br></br>To end the coyness, we understand perfectly well why the markets are in turmoil. The markets are not afraid of growth. The markets are afraid of the Federal Reserve Board.</br></br>We yield to no one in our admiration of Paul Volcker. If we had to pick one mortal on the face of the earth to run monetary policy out of his hip pocket, he would be our instant choice. But Chairman Volcker has to keep lecturing the markets about "overreacting" -- to the latest money supply figures, to his own statements, or to whatever else the market may settle on as a clue to whether he may ease or tighten. Just now, the markets have decided that the clue to Fed policy is real growth, and this overreaction sends them schizoid. They know growth is good, but worry that the Fed thinks that fine-tuning real growth is the key to controlling inflation. They worry that if growth comes in better than the economists' computers think it ought to, the Fed will feel impelled to stamp it out by tightening money.</br></br>Where would the markets get the notion the Fed might follow such a screwy theory? Well, just possibly the money managers have read the most recently released minutes of the Fed's Open Market Committee. At its March 26-27 meeting the FOMC voted to tighten, raising the target range of the federal funds rate to 7 1/2%-11 1/2% from the 6%-10% that had prevailed since November. Governors Henry Wallich and Lyle Gramley dissented on this vote because they wanted to tighten even more in view of "the strength of the economic expansion."