Editor's Note: While everyone bets on a quarter or half-point increase in rates today, the market may have become too complacent about Greeenspan's predictability. Has anyone wondered what Alan Greenspan may really be thinking? Below, Columnist Jim Griffin gives a rendition of what might be on the chairman's mind this afternoon.
What's the point of showing up for work today? Everybody knows we're going to raise the target funds rate, but they quibble among themselves about whether it will be another 25 basis points -- or a 50 pointer this time.
Whatever, it won't matter much because "it's in the market." The past several days of trading have been expressions of relief that we're on the job, that we've pretty much solved the problem by now, and that the end is in sight for our well-intentioned but unfortunate foray into the realm of monetary restraint.
It's tough to win the pot when everybody can see your cards. You score no knockouts when you telegraph your punches. The market, after all, is not our dance partner -- we do not invariably work together with the market to achieve our purposes. Sometimes it's a symbiotic relationship, as it has been for nearly all of the past five years. But sometimes it's adversarial.
This economy is cooking. There can be little doubt of that any longer. And the rest of the world is picking up -- we don't have to worry so much about possible offshore effects of our restrictive actions as we did in the months following the 1997 and 1998 financial spasms. Inflation is not yet clearly a problem -- but waiting until it becomes clear is not a satisfactory option.
Making monetary policy is a lot like making investment decisions -- you have to take a leap of faith into the great unknown that is the future. Once it is known, you've missed your chance.
Everybody expects us to tighten in a moderate and responsible manner today -- then they'll play their cards and flash their footwork to foil our purposes.
We might fox 'em. I'd love to cross them up. How about 100 beeps? That'd catch 'em on the point of the chin. How about 200?
Yeah, I know -- that would be irresponsible. You can't run monetary policy as if it were a hedge fund.
Or can you? Where is it written that we have to do what the market expects? Why, when we are trying to restrain the pace of economic activity in the interest of preserving price stability, do we have to exert steady pressure on the brakes? When we're working against powerful momentum, as we are now, that is like riding the brake down Pike's Peak -- you can burn them out and then where will you be? In real trouble, that's where.
That's the situation my esteemed predecessor,
, found himself in when he took this job back in 1978. What did he do? He changed the rules. He jerked on the reins in unscheduled bursts of unprecedented violence. He introduced some mumbo-jumbo about "practical monetarism" to deflect criticism, to pretend that policy was on a sort of automatic pilot. The effective funds rate reached 19% in April 1980. It was 9% by mid-July. It was back up to 19% by Christmas. Guess with the Fed, will ya? How do you like 2000 basis-point round trips?
Did it work? You bet it did. Did he get respect, and even fear, from the cardsharks in the market who today think they've got my number? Darn straight he did.
OK, so conditions are much different today. But I don't like to have my decisions made for me in advance by the markets or the polls. Peek at my cards, will they? I'd love to knock 'em on their butts.
If I do that, I'm sure to get lambasted by the Street, and by the both sides of the aisle on the Hill. But I may one of these days have to choose between being popular, being "responsible" -- and being effective. I'll take effective any day.
Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at