FEDERAL RESERVE BOARD CHAIRMAN Alan Greenspan is famous for his ability to use the language with such precision that it ceases to be a means of communication. He once told a congressional committeeman, who congratulated him on the clarity of his response to a question, "Then I must have misspoken."

Under most circumstances, this gift of tongues is a useful endowment for a central banker of Greenspan's importance: a man whose words can move markets must often be certain that no one has a clear understanding of what he is saying. But so accustomed are those who make a living deciphering the meaning of the chairman's utterances, that they often fail to grasp what he is saying when he chooses to be perfectly clear, and use language that is not wrapped in obscure jargon, but is merely a straightforward statement of intentions.

Which is why so many Fed watchers spent too much time looking for the inner meaning in Greenspan's clear statement of the direction in which interest rates are headed. Late last year Greenspan said, "Rising interest rates have been advertised for so long and in so many places that anyone who hasn't appropriately hedged his position by now obviously is desirous of losing money." No hidden meaning, nothing up the chairman's sleeve except more increases in interest rates.

But what about the fact that inflation remains tame, and that the job market is not as buoyant as many U.S. policymakers would wish? And what about all that excess capacity that still exists in the manufacturing sector and in world labor markets? Finally, what about inflation-dampening, rising productivity, the phenomenon that Greenspan detected earlier than most, and on which he counted for so long to restrain inflation while he kept interest rates low enough to give the American economy a needed boost?

Consider these in turn. The once sluggish job market has regained some of its bounce, adding 2 million jobs last year. The unemployment rate is low, and new job creation high. It is no longer clear that a further stimulus is needed to add to the job-creation rate already under way.

As for excess capacity, well, some still exists, especially if we count capacity available in those markets that have become globalized. But, as the Economist puts it this week, "the gap between America's actual and potential output has closed"--another reason why Greenspan feels he must raise interest rates before too much pressure builds on existing capacity.

Productivity increases are also less of a restraint on inflation than they once were. With wages rising, energy costs stabilizing but at higher levels than were once deemed comfortable, health care costs seemingly headed for the stratosphere, and food on grocers' shelves more expensive than ever, Greenspan can no longer count on productivity increases to offset as much of this cost pressure as it has in the past.

Then there is the dollar, which before it became clear that the Fed is intent on continuing its rate-raising course, had been falling steadily against all save the pegged currency of China. This has eased the pressure that "cheap" imports put on U.S. manufacturers, permitting satisfied murmurs of "the return of pricing power" to be heard once again in many board rooms.

Add to all of this one of the interesting features of Fed decision-making. Greenspan has always organized meetings of the Federal Open Market Committee to place the burden of proof on those who would change existing policy. That policy now is to raise rates by one-quarter of a percentage point (.25 percent, or 25 basis points in the jargon of financial markets) at each meeting of the committee.

That will bring rates to 3.5 percent by the time the August 9 meeting concludes, assuming that Greenspan resists pressure from those governors who scent more than a whiff of impending inflation, and want to move rates up faster. The goal is to get to a level at which interest rates are "neutral," neither likely to stimulate nor to rein in the economy.

The small problem with all of this is that no one really knows just what level of interest rates will be truly neutral. The inflation doves at the Fed say that 3.5 percent is the number, and the policy of raising rates can therefore come to an end this summer. Marc Sumerlin of the Lindsey Group, points out that some 70 percent of inflation is driven by labor costs, and even after its recent improvement the jobs market is not so tight as to threaten a spurt in those costs.

The inflation hawks, and this includes the presidents of many of the regional Federal Reserve Banks, put the "neutral" number closer to 4.5 percent, and would continue to move rates up by .25 percent at each of the meetings to be held on September 20 and November 1. That would put interest rates at 4 percent, but, I am told, the hawks won't be willing to call a halt.

There is more than just fighting inflation that the Fed has to consider. That done, it has to decide whether to attempt to correct the so-called imbalances--America's huge trade deficit, its savings deficiency--or let the economy grow, continue to suck in imports, and live with the imbalances. If Greenspan decides that the Fed must take decisive action to correct these imbalances, he will then have to choose between keeping rates down and relying on a falling dollar to reduce imports, or pushing them above the neutral to slow growth and therefore imports.

The intricacy of the task of monetary management should be obvious. Which is why markets tremble at the thought of the talented Greenspan's impending retirement on January 31 next year, and have begun worried speculation about his successor. Of which more in later columns.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.

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