Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SATURDAY, April 20, 1991                   TAG: 9104200213
SECTION: BUSINESS                    PAGE: A-8   EDITION: METRO 
SOURCE: Associated Press
DATELINE: WASHINGTON                                LENGTH: Medium

FED POLICY DISPUTE HALTS CREDIT EASING/ MONE NOT EXPECTED TO HURT ECONOMIC

The change, economists said, is not likely to abort what most believe will be an economic recovery as soon as June or July. But some are worried that the central bank, if it does not ease interest rates further, will hurt chances for robust growth in the future.

The policy debate also could have a political fallout. Federal Reserve Chairman Alan Greenspan is still considered the odds-on favorite to win renomination when his term expires in August. If he is unable to win further interest rate cuts, however, his chances could nose dive, analysts said.

However, many economists said there is no credible candidate on the horizon to take over from Greenspan and therefore they rated the chances that he would be ousted as extremely low.

What's been revealed in the last two weeks from the normally secretive Federal Reserve suggests a tense debate on the Fed's key policy-making panel, the Federal Open Market Committee. That committee includes Fed board members in Washington and five of the 12 regional Fed bank presidents.

The disagreement was first reported in a newsletter published by former Fed Vice Chairman Manuel Johnson. It shows an open market committee sharply divided between two camps. One is led by Greenspan, seeking further interest rate cuts. Another camp, composed primarily of the regional bank presidents, who fear any further easing will worsen inflationary pressures in the upcoming recovery.

Fed officials, speaking on condition of anonymity, gave the following account of events:

The debate surfaced Feb. 1, when some members of the FOMC questioned whether Greenspan had the authority acting alone to push the federal funds rate down by one-half percentage point to accompany a one-half point cut in the discount rate.

The federal funds rate is the interest banks charge each other for overnight loans. It is controlled by the FOMC while changes in the discount rate, the interest the Fed charges for bank loans, is set by the seven Fed governors in Washington.

Greenspan cut the funds rate but agreed to bring the matter of his authority up at the next FOMC meeting Feb. 5.

At that meeting, there was vigorous argument between the pro-growth "doves" on the board and the anti-inflation "hawks."

The two sides asked the Fed's staff to research Greenspan's authority to change interest rates between FOMC meetings and report back at the March 26 session.

At that March session, Greenspan agreed to a compromise that commits him to greater consultation with other FOMC members before making interest rate cuts.

Just a week ago, many economists believed that even with the policy split Greenspan would be able to push through another round of rate cuts, given government reports showing that the recession deepened in March with the unemployment rate hitting 6.8 percent while underlying inflationary pressures appeared to be easing.

On Monday and again on Thursday, the central bank sent what analysts said were unmistakable signals that it is content to leave the federal funds rate at 6 percent, where it has been since the last Fed easing on March 8.

"I think it is clear that they have put policy on hold," said David Berson, chief economist at the Federal National Mortgage Association.

While some economists said they were not looking for any further interest rate cuts, Berson said he believed the Fed would take one more easing move after the May 14 meeting, cutting both the federal funds rate and the discount rate. He said this would probably be enough to push banks' prime lending rate, now at 9 percent, down to 8.5 percent. He said that was likely to be the last Fed rate cut this year.

David Wyss, chief financial economist at DRI-McGraw Hill and a former Fed staff member, said reports that Greenspan had lost control at the central bank in some kind of palace revolt greatly overstated what was occurring.

"You always have this type of infighting going on, especially at turning points in the economy," Wyss said. "But the danger is that if we are wrong about an imminent recovery, then the delay in easing credit further could end up making the recession longer and deeper than we had expected."