By now it is abundantly clear that the consequences for the general price level of the upward spiral in crude oil prices have been nil. The market’s most sensitive indicators of monetary value – gold, foreign exchange and the Treasury yield curve – have all to one degree or another been signaling a dearth, not a surplus, of dollar liquidity. Correcting for the oil spike, even the government’s distorted statistical indices have shown virtually no effect of the crude price tripling since early last year. Producer prices, less energy, are up 1.8% year-over-year, and the core consumer expenditures deflator even less.  Reflecting a change in relative prices, rather than a weakening in dollar purchasing power, the oil price rise has an economic effect much like a tax hike, and has likely been a factor in the slowing now apparent in the macro data. The recent round trip in crude prices, however, will print large in the headline numbers in next month’s round of “inflation” reports, playing into the hands of the Fed hard-liners desperate to justify their ludicrous stance. Thus the abrupt retreat in the credit markets this week, with the 30-year Treasury giving up the gains posted last week, represents a discounting not for higher expected inflation but for the risk that the Fed will seize on the news as an excuse to continue pushing rates higher. No doubt some of the Phillips Curve true believers among market pundits will also attempt to use any pop in the indices to sustain the myth that prices are being driven up by the dreaded “wage inflation.”

Given the uncertain Fed policy outlook, it’s difficult to see much immediate upside potential at the long end of the Treasury yield curve.  From any longer-term perspective, though, a spike above 6% on the long bond yield probably presents a buying opportunity. Petroleum prices are unlikely to maintain their upward thrust from current levels, and the Fed hawks will be hard pressed to continue their assault without the support oil has been lending to the inflation data. When all is said and done, this rate-hiking exercise is likely to terminate with no more than another 25 basis point hike in the funds rate, to 6.75%. The market at this point is leaning toward 7%.    

There’s little doubt, though, that the Fed next week will confirm expectations and leave the funds rate at 6.5% for now. Even for those FOMC members still convinced that the level of real economic activity carries the ever-present threat of an inflation breakout -- which accounts for a sizable portion of the membership -- a pause after the past year’s 175 basis points in rate hikes represents the shrewd choice. Policy makers would risk exposing the central bank to a gale of public criticism were they to pull the trigger on another rate hike now in the face of gathering indications of slowing growth.

Indeed, with elections barely four months hence, the FOMC’s war on growth has at last drawn the attention of congressional Democrats who claim to speak for the marginal workers that are most at risk from the Fed’s reckless pursuit. The potential political consequences of the Fed’s campaign to staunch the shift to a more capital-rich, labor-scarce environment appears finally to have dawned on some of the more astute Dems. That potential might be magnified considerably if it ever becomes more widely known that the Fed’s leading growth-phobes  -- Lawrence Meyer, Edward Gramlich and Roger Ferguson – are all Clinton appointees.  But the 16 House Democrats, led by Minority Whip David Bonior, who sent a shot across the FOMC’s bow in the form of a pointed letter this week, are surely aware of it.  “Proceeding with further efforts to slow down the growth of our economy at this point means accepting increases in unemployment and real economic damage to our least prosperous citizens because of a fear of an inflation of which there is no significant evidence,” said the letter. “It is now clear that an increase in interest rates at this time – on top of the very significant increase you have voted over the past year – is likely to lead to an unnecessary and socially damaging increase in unemployment without any significant offsetting advantages,” the Democrats asserted.

Could these Democrats have an unspoken ally in Alan Greenspan? The Fed Chairman has recently displayed a curious ambivalence toward the assault on growth. It’s true that Greenspan has developed a keen sense for keeping close observers off guard by showing no particular consistency of approach over the years. There are times, however, when he will signal that a shift in his thinking is underway, and this could be one of them. His speech last week exploring the extent to which the government’s official macroeconomic accounts have failed to capture the productivity gains of the information technology revolution was notable in several respects. For one thing, it avoided any of his earlier nonsensical rationalizations that strong productivity gains could in themselves be feeding excess growth in aggregate demand. But perhaps even more telling was his enthusiasm for the superior insights into productivity improvement gleaned from a disaggregation of data from the non-financial corporate sector.  Among other things, this exercise revealed that “for about four years price inflation has remained subdued – with prices rising on average about one-half percent per year.” For Greenspan, of course, the issue is not what inflation did yesterday, but what he thinks it’s likely to do tomorrow.  Nonetheless, his stated appreciation for the radical acceleration in non-inflationary, innovation-driven expansion unearthed in the data could reflect a new realization of the economy’s improved growth potential.