Alan Greenspan and the Federal Reserve Board are expected to hike short-term interest rates by a 1/4 point next week in an apparent response to inflation expectations. Of course, one must ask: What inflation expectations?

If one subscribes to the old, discredited Phillips Curve notion that more jobs or more economic growth create inflation, then recent trends would be worrisome and the Fed should tighten monetary policy. However, in reality, inflation is not caused by too much economic prosperity; it is a monetary phenomenon whereby the Fed pushes money supply ahead of money demand.

A key market gauge of inflation expectations remains the price of gold. Gold has long served as a hedge against inflation. As noted below, the price of gold has been on a long, steady decline:

Date: Gold Average Monthly Price Per Ounce
1/96  $406.30
1/97  $344.35
1/98 $289.15
1/99  $287.07
7/99 $256.08

Obviously, the market sees no serious inflation threat on the horizon. If anything, the price of gold points to risks of deflation. Further interest rate hikes by the Federal Reserve would only serve to increase deflation worries and probably slow the economy.