It has been nearly four years since members of the Federal Reserve last raised interest rates and the result was devastating.

The squeeze on monetary policy rapidly let the air out of the Internet bubble in the stock market, destroying trillions of dollars earmarked for Americans’ retirements. As high-tech icons tumbled, down came bastions of the telecom industry as well. The economy shuddered and fell into recession. Jobs vanished.

To try to set things right, members of the central bank have spent many months trying to rebuild lost wealth, ratcheting rates to their lowest level in 46 years.

So when Fed Chairman Alan Greenspan steps to the microphone Wednesday to talk about monetary policy to members of Congress, don’t look for him to offer much in the way of specific warnings about tightening credit soon.

Chicago economist Brian Wesbury says Greenspan’s tone about where the economy is headed, however, will change noticeably.

“Until now, the Fed chairman has included the prospect of deflation in his descriptions of the economy, but from now on the emphasis will be much more buoyant,” said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.

He said Greenspan will point to booming retail sales and an improving job market, as well as other signals that the economy is blossoming into a true, sustainable recovery.

Additionally, Wesbury said, Greenspan and members of the Fed are ready to adopt a tougher policy stance, in view of slight stirrings by inflation.

“They are through taking baby steps and now will begin making full strides toward a rate hike, which is inevitable,” Wesbury said. “It is only a question of when.”

He expects the Fed to pull the trigger by tightening policy in August.

The leading economic indicators are supposed to be able to foretell activity six months into the future, so a few eyebrows were raised when the numbers for February ended flat.

The reading for March will be released Monday, and economist John Silvia is calling for a rise of 0.4 percent.

“Just about all economic reports for the month showed a rise,” said Silvia, of Wachovia Securities in Charlotte, N.C. “About the only weak trend was seen in hours worked in factories, which showed a slight dip.”

The surge in the overall economy extends to manufacturing, which is showing the best signs of expansion in about 20 years. But some analysts worry that high fuel costs will slow the momentum.

Economists expect Friday’s report on March orders for durable goods to show a rise of about 0.7 percent, on top of the 0.4 percent increase a month earlier.

Economist Ian Shepherdson says that Americans have learned to live with higher costs for heat and fuel and that the recent escalation won’t prove devastating.

“Surging tax refunds have swamped the adverse cash flow effect of higher energy prices on consumers, and spending has continued to rise strongly,” said Shepherdson, of High Frequency Economics, Valhalla, N.Y.

He said low interest rates remain a much more important factor in driving the economy forward than the stubbornly stratospheric cost of gasoline is in restraining it.

The stock market has shown signs of life in recent days, but is locked in a trading range that began at the start of this year.

Flossmoor, Ill., investment adviser Richard Evans says the situation reminds him of 12 years ago, when President George H.W. Bush was seeking reelection.

“With so much uncertainty over this fall’s election, the stock market can’t go far in either direction,” Evans said. “If we hit a new high, it is likely to pull back by 10 percent.”

He said the economy’s status also reminds him of 1992: “The economy is recovering, and more people are working, but people are very slow to perceive there is any improvement.”

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(c) 2004, Chicago Tribune.

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