The trouble with using the expectations theory to try to explain the market's strong response to this week's inflation report is that the rise in consumer prices was just about in line with expectations, neither above nor below them. The consensus of economists has been that consumer prices would rise in 1989 by about 5 percent. If anything, the March report was worse (not better) than expected. But excluding food and fuel prices, which jumped, the Consumer Price Index rose at an annual rate of about 5 percent. Loath as it is to start a recession, the Fed is just as wary of losing its credibility as an inflation fighter: Alan Greenspan, its chairman, and his colleagues are caught in a corner between ''tighter'' and ''looser.'' In that bind, the Fed is likely to stay about where it is until it can determine where the greater threat is coming from. As Mr. Greenspan said in Congressional testimony earlier this year, ''If we remain attentive to the course of events and take prudent actions on a timely basis, I am optimistic that we can make further progress toward the objectives of full employment and price stability.''
Full text: New York Times, Apr 21, 1989
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