For Alan Greenspan, Labor Costs Are Key

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With so many sets of seemingly conflicting economic data coming out on Thursday and Friday, Wall Streeters could be forgiven for taking a wait-and-see attitude as the week ended. The stats, showing both hopeful and distressing signs about potential inflation, were enough for investors to keep their heads in the sand and concentrate on catching the wave of a rebound market for tech stocks. What they can't afford to do, however, is to ignore the figures that most interest Fed chairman Alan Greenspan — labor costs — as he prepares to decide whether to raise interest rates again when the Federal Reserve meets in May. And those figures were bad. On Thursday the government reported that the labor index had its largest single-month increase in eight years this March. "The labor cost index has been going up in fits and starts for a couple of years," notes TIME Wall Street correspondent Dan Kadlec. "That's something Greenspan watches very closely. He's been concerned for years that the low unemployment rates will lead to workers' demanding higher wages, and then prices will go up across the economy."

And that, to Greenspan, is anathema. "The latest thinking," says Kadlec, "is that he'll bump interest rates 50 basis points, as opposed to the usual 25, and that he'll continue to raise rates for the foreseeable future. Come late May, when these rate hikes seem inevitable, the Dow will inevitably buckle, and I think the NASDAQ will follow." Kadlec also warns of a false sense of security. "People are kidding themselves if they think this market has become safe again," he says. "The market has stabilized in the past two weeks and people have very quickly become complacent again. They don't seem to mind the inflation figures — and that's particularly true of NASDAQ investors, because tech companies aren't as affected by inflation as old-economy firms are. But rising interest rates are another story. They're a problem for all stocks."