But, warns TIME senior business writer Bernard Baumohl, if the Fed misinterprets the signs — which it might well do — it could plunge the economy into a recession. "We have an ideal situation here where the economy is growing at twice the speed limit set by the Fed, and yet inflation pressures are actually diminishing," says Baumohl. "That challenges the Fed's basic assumption that the economy can't experience prolonged growth above 3.5 percent without inciting inflation. That's exactly what we've seen for several years now, but Alan Greenspan still believes we're overheating."
Fear of the specter of inflation will likely prompt further interest rate hikes by the Fed — Baumohl expects rates to rise a half percent by the summer — but the economy may already have gotten Greenspan's message. "Remember, the latest numbers are already out of date," says Baumohl. "Many analysts believe the economy is already slowing to a growth rate closer to 3.5 percent as the effects of the rate hikes since last June are felt." But the new numbers highlight a growing debate among economists over whether the rules of the economy have changed. While the Fed remains wedded to the orthodoxy that growth above 3.5 percent must eventually spawn inflation, a number of other economists believe that productivity increases brought on by the new high-tech economy have fundamentally altered the rules, allowing for higher growth rates without inflation. "The latest numbers suggest the Fed has to be more open to the idea that the economy may have changed fundamentally," says Baumohl. "If they remain locked in to their current thinking, there's a danger that they'll over-tighten the money supply with rate hikes, which could plunge the economy into a recession."