An exhausting trip up and down the ladder

Some of my economist friends were unhappy about this week's print column, in which I warned against the political use and abuse of business cycle statistics. They didn't like my hostility to fiscal fine tuning, and thought I came dangerously close to throwing up my hands and saying, 'it's all relative'.

Particularly interesting was an email from David Gitlitz of TrendMacrolytics (, a research and consulting firm. Mr Gitlitz felt I was glossing over the whole matter when I should have been assigning blame for real pain where it belonged: with the Federal Reserve and Chairman Greenspan.

Or, as Mr Gitlitz himself put it: the downturn 'had huge costs in terms of lost wealth and profit opportunities. And the fact is, the severity of this wealth and profits slump was almost entirely avoidable as it was the result of deflationary monetary policy error by a central bank that took it upon itself to rein in an economy that it felt sure was just too damn good for its own good. The costs of that sort of bureaucratic arrogance should not be lost in this.'

The issue here is Fed tightening, which began in 1999. In June 1999, the Fed raised the fed funds rate to 5 per cent from 4.75 per cent, and then kept increasing it until it reached 6.5 per cent in May 2000. The Fed based its action on such factors as a tightening labour market and the oh-so-low US unemployment rate. This was the period, market watchers will recall, when Chairman Greenspan was going around worrying about a coming labour crunch. Chairman Greenspan was also concerned about a 'wealth effect', and how it might fuel inflation.

Instead, say Mr Gitlitz and team, the Fed should have been watching price indicators such as commodities and the dollar. From a level of just under $290 at the beginning of 1999, gold slid to $260 in June of that year and then dropped further, bottoming out at $250 that summer. Then there is the CRB spot index, which does not include oil. It started out at the beginning of 1999 at 234 and fell to 224 by June. In the same period the trade-weighted G-6 dollar went from around 94 to 102 in June to 104 in July. 'A strengthening dollar is a dollar that is becoming scarcer', says Mr Gitlitz. This means, he says, there was deflation domestically. Yet the Fed was fighting was inflation.

In other words the world could have been spared the long trip up the interest rate ladder (six increases), and some of the long trip down (11 cuts since January 2001). Instead the Fed could have been a little less active, and fought for stability.

What about now? In Mr Gitlitz's view, the worst of the deflation is over (the CRB and gold are both up). Maybe it's time, he suggests, after this frenzy of activity, for the Fed to take a rest.

I'm not sure Mr Gitlitz has it totally right, but I am sure this many micro steps have a disruptive effect all by themselves, and that the US could do with a better defined monetary law that did not hinge, as the current one does, on the old Keynesian notion that growth is inflationary and must be managed.

Which brings us back to the original question: is fine tuning necessary?

* * * *

The email is still coming in from readers who are concerned about Sufiyatu Huseini, the Nigerian woman who was sentenced to be stoned to death for the crime of adultery. Most readers want to know where to go to help. One answer is Human Rights Watch, whose website is available at and whose press spokeswoman Minky Worden can be reached at email address HRW informs me there will be a decision on her trial March 18.

© Copyright 2002 Financial Times

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