Reply #53: A good excuse

[54anickel]

http://www.jpost.com/servlet/Satellite?pagename=JPost/JPArticle/Printer&cid=1092280015910&p=1062388728912

Faced with serious erosion in his key asset, namely credibility, the chairman of the US Federal Reserve found a convenient scapegoat. Only 10 days after Alan Greenspan had assured both Houses of Congress, in separate testimonies on succeeding days, that the recovery in the American economy was proceeding well and that the weak data relating to the second quarter of 2004 were no more than a transient "soft patch," his optimism was blown out of the water.

The labor market data for July, published last Friday (August 6), confirmed the indications arising from several earlier pieces of data, that the weakness was continuing into the third quarter. Indeed, the jobs data for July were so bad – "beyond the wildest imaginings of the most confirmed pessimist," in the memorable words of one stunned analyst – that they called into question all the existing assumptions regarding the expected rate of growth in the US and, by extension, every other economy in the world.

On Tuesday, Greenspan was forced to respond to this unwonted development – because the Fed's Open Market Committee was holding a scheduled meeting to decide about interest rates. Since there was a universal expectation that the Fed would raise rates by one-quarter point, for the second successive time, not doing so would have been seen as an admission that things were going badly wrong. Furthermore, rates are so low that they have to be raised, come what may.

However, in its announcement that accompanied the rate rise, the Fed noted the slowdown in the economy – it could hardly do otherwise – and also pointed its finger at the cause: the high price of oil.

There are actually two issues here, both of which have been raised in this column over recent months. One is the state of the US economy, even without the problems raised by the rise in the price of oil and the factors responsible for it. Greenspan is the cheerleader of the "everything's great" camp, which believes that the economy will continue to expand – thanks to rising productivity, increased corporate investment and a generally benign state of affairs, both at home and abroad.

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