WSJ: Greenspan's $40 Oil

Wall Street Journal ^ | December 14, 2004 | Editorial

[OESY]

What a difference a news leak from the Federal Reserve makes. Ever since this newspaper ran its December 2 page-one article, "Fed View Shifting on Inflation: Rate Rises Likely," the world's leading indicators of future prices have been heading back down.

David Malpass of Bear Stearns points out that gold has since dropped to $434 or so from a peak of $456, oil is back down to $41 a barrel and the dollar has been firmer in currency markets. Amazing how that works: The Fed finally signals that it is going to print fewer dollars, and inflation expectations begin to recede.

...Some months ago we wrote an editorial, "The Fed's $53 Oil," attributing the price spike in oil and other commodities in part to a too easy Fed policy. Speculators were bidding up those prices in anticipation of an inflation revival. But the December story sent a signal that Alan Greenspan doesn't intend to end his long, successful tenure as Fed Chairman by doing an Arthur Burns imitation, circa 1972. And markets have been glad to hear it.

To be fair, the Fed's open-market committee (which meets again today) has hardly been alone in being behind the price curve in the last year. Many mainstream economists have been surprised by the strength of the expansion since mid-2003 and have worried that interest rate increases might sink it. Yet the economy has held up nicely, despite the oil spike and rising rates, thanks in part to the Bush cuts in marginal income-tax rates. Third-quarter GDP growth checked in at a healthy 3.9%, notwithstanding the predictions by Robert Rubin and the "twin deficits" crowd that disaster is nigh. The weak dollar is mainly a monetary phenomenon and has little to do with budget or trade deficits....

[eno_]

Ha! An excellent way of headlining an article "Sky Not Falling." On NPR last night, the loathsome leftist lady was utterly horrified that the stock market was up.