Fed's Fiscal Policy Becoming 'A Nightmare,' Hassett Tells Tech Central Station

Business Wire, Nov 1, 2000

Business Editors

WASHINGTON--(BUSINESS WIRE)--Nov. 1, 2000

The Fed's fiscal policy is painting a "scary" picture that will long outlast Halloween, argues AEI Resident Scholar Kevin Hassett in response to the release of the latest Gross Domestic Product (GDP) figures last week. After reaping innumerable plaudits for years of expansion, the Fed's policy since last June is now stifling capital investment and crippling prospects for future growth, he says: "It is too early to panic, but I am certainly nervous."

The piece was released today on Tech Central Station, the website that covers the convergence of politics, technology and investing.

On the lower growth figures, writes Hassett, "The strange thing is that the old-economy Fed watchers seemed quite happy with the GDP report, and the Dow advanced significantly in response to it. New Economy types, however, know that the positive supply shock from higher equipment spending has been the source of our high growth and low inflation."

Hassett notes that capital spending is screeching to a halt: From 21% in the first quarter of this year, to 14.6% in the second quarter, to last Friday's figure, that capital spending increased only 6.9 percent in the third quarter.

Yet "oblivious to the source of U.S. growth (capital spending rather than consumer spending)," points out Hassett, "some at the Fed have been concerned that GDP has been growing too fast, and have been giving us rate hikes anyway. Put it all together and a fairly scary image emerges. The rate hikes have suppressed supply but not demand. So, after all that pain, we have the same demand chasing fewer goods. The Fed rate increases have likely increased the risk that inflation will take off!"

Hassett points to a "nightmarish scenario" that could result: "Inflation starts to take off in the coming months because of slower capital spending and steady consumer demand. The Fed sees higher inflation -- which is magnified by the oil shock -- and raises rates again. This depresses capital spending even more, and consumption just a little, so inflation accelerates. The spiral ends only when the Fed slams the economy into a deep recession."

Concludes Hassett, if the growth numbers pick up, "the New Economy will have proven more powerful than interest rate hikes. That could happen, but the one reliable measurement we have of fourth quarter activity is not looking good.

"Which leaves us, this Halloween week, with some scary things to think about."

James Hassett is a resident fellow at the American Enterprise Institute. For the rest of his article, log onto www.TechCentralStation.com.