The Phantom of the Fed
By DANIEL GROSS

Published: June 27, 2004

EARLY this week, the Federal Reserve Board will raise the federal funds rate, breaking the seal on the worst-kept secret since the Marc Anthony-Jennifer Lopez wedding.

During the past year, the Fed kept rates low even as the economy expanded and as signs of rising prices - in oil, rolled steel and Upper East Side co-ops - became more evident. The reason was that Alan Greenspan, the Fed chairman, and his colleagues feared the specter of deflation. And it seemed that they had good reason to do so.

The core Consumer Price Index, which excludes volatile energy and food prices, was falling sharply, to a year-over-year rate of 1.1 percent in December 2003 from 2.7 percent in November 2001. That usually does not happen when the economy is accelerating out of a recession, and signs of unwanted slack abounded, from the labor market to industrial capacity.

But in recent months, a chorus of voices, including some within the Federal Reserve, has suggested that technology, globalization and the Fed's own recent aggressive actions may have skewed the numbers on which it relies.