Just as Wall Street's Fed-watchers anticipated, Alan Greenspan's Federal Reserve last Tuesday raised the federal funds rate (on interbank lending). But why unexpectedly also raise the discount rate (on Fed lending to banks)? The answer validates both Greenspan's mastery and the danger posed by it.

Because banks rarely seek loans at the discount window, raising that rate exerts little or no economic effect. But savvy analysts have a theory. Greenspan was concerned that investors would exhibit "irrational exuberance" in the stock market when he signaled that another federal-funds hike in October is improbable. So he tamped down expectations and put a confused market on a roller coaster.

Thus did Dr. Greenspan burnish his reputation among the financial cognoscenti as "Master of the Universe." But it underlined that his Federal Reserve has been tracking equity markets -- activity unprecedented for a central bank. If Greenspan seems more interested in bond yields than the real economy, his overpowering prestige limits critics to peevish editorial writers and a few Republican presidential hopefuls.

The avowed purpose of Tuesday's tightening was to guard against revived inflation. But Greenspan's own colleagues at the Fed privately admit that there is no inflation (though only Dallas Federal Reserve President Robert McTeer, noting the falling price of gold, has dissented publicly). Current reports show an anemic growth rate of 1.8 percent.

What's more, raising the federal funds rate just one-quarter of 1 percent has consequences. The previous hike hoisted mortgage interest to 8 percent, undermining housing sales. Depressed farm commodity prices stay depressed when the central bank tightens. The Fed has shut down the economy in the past and can do it again.

But the people who watch the Federal Reserve most closely are more interested in Wall Street than Main Street. One remarkable explanation Fed-watchers gave for why the rate hike was necessary is that Greenspan's congressional testimony had raised expectations in the bond market that could not be disappointed. That confers a special status for bond traders.

This bias undermines the Federal Reserve's privilege of secrecy in a democratic society. Its closed-door meetings without a verbatim transcript, and the release of skeletal notes weeks after it acted, are justified on grounds that democratic procedures would result in an inflationary orgy. But the upshot is that the bond market is given special treatment while the merchant, the farmer and the home buyer are ignored. What worries Greenspan is stock prices, as he made clear Friday at the annual gathering of the world's central bankers at Jackson Hole, Wyo.

The traditional antidote to the Fed from elected politicians has become tepid. Although members of Congress who approve of Greenspan's last two rate increases are rare, scarcely a dissenting voice was heard last week from lawmakers spread across the globe during the congressional recess.

For five decades, I have witnessed Fed chairmen elevated in prestige beyond all reason: William McChesney Martin, Arthur Burns, Paul Volcker. But none has approached Greenspan's invulnerability. Although the Fed has made mistakes of judgment during the past seven years, this central bank improbably is credited with American prosperity. Its last two rate increases are viewed as mindless by many administration economic officials, but a gag order has been placed on any criticism. Bill Clinton, uncharacteristically, says not a word.

Republican presidential campaigners, noting farm price deflation, were impolite enough in their Iowa campaigning to say that the "Master of the Universe" wears no clothes. But front-runner George W. Bush's support for Greenspan is unconditional. His chief economic adviser, former Federal Reserve governor Lawrence Lindsey, argues that Greenspan should have been even more vigorous in boosting interest rates.

Lack of vigorous Republican opposition to Fed austerity derives from the same mind-set that passed a tax bill dedicated to the equally no-growth concept of debt reduction. In an Aug. 18 letter to Senate Majority Leader Trent Lott, Jack Kemp declared: "I believe it is time for the Republican Party to alter its course and denounce a debt retirement economic strategy as ill-conceived, ill-advised and counterproductive under current circumstances." Like criticism of Greenspan, it was a voice in the wilderness.

(C)1999, Creators Syndicate Inc.