ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Thursday, July 11, 1996 TAG: 9607110058
SECTION: BUSINESS PAGE: B-8 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: Associated Press
A NEW STUDY recommends tolerating a little more inflation in the name of stronger economic growth and more jobs.
As catch phrases go, ``opportunistic disinflation'' is certainly a mouthful. But a new Federal Reserve paper on the subject has the economics world buzzing.
Some see it as sign that hawkish Alan Greenspan and his colleagues may be willing to tolerate a little more inflation in the name of stronger economic growth and more jobs.
Here's what the report said: ``When inflation is low but still above the long-run objective, the Fed should not take deliberate anti-inflation action but rather should wait for external circumstances - such as favorable supply shocks or unforeseen recessions - to deliver the desired reduction in inflation.''
The paper, prepared by two Fed staff economists, called the proposal a ``new approach to monetary policy'' and said it could be best described as an ``opportunistic approach to disinflation.''
The central bank made the 29-page study available Wednesday.
Officials at the Fed stressed that the document was only a staff study and did not represent the official position of the Fed's primary rate-setting group, the Federal Open Market Committee.
``Some members of the committee would support it, but other members of the committee might have different views,'' said Fed spokesman Joe Coyne. ``The chairman hasn't taken any position.''
Some private economists, however, said they were worried by the implications of the Fed article. Greenspan has jealously guarded the Fed's inflation-fighting reputation, going so far as to launch a pre-emptive strike in 1994 against inflation even though critics charged he nearly shoved the economy into a recession to battle a nonexistent threat.
These economists argued that if this paper became official Fed policy it would raise concerns in financial markets about the central bank's inflation-fighting resolve.
``If the Fed were truly following this approach, the risk of an outbreak of inflation would appear greater than it would have been under the more traditional approach to policy,'' said Marilyn Schaja, an economist at Donaldson, Lufkin & Jenrette in New York.
Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis, said the risk in waiting for a recession to reduce the level of inflation is that the central bank could slip back into the inflationary spiral of the 1970s when the Fed failed to fight inflation vigorously enough.
That forced Paul Volcker, then Fed chairman, to push interest rates up to levels not seen since the Civil War, triggering the 1981-82 recession, the worst downturn since the Great Depression of the 1930s.
``The danger is that the Fed would be inviting future inflation by being accommodating too long,'' Sohn said.
Lyle Gramley, a former Fed board member and now chief economic consultant for the Mortgage Bankers Association, said the real issue is not whether the Fed is trying to get the inflation rate down even further, but whether it will wait too long when it sees price pressures starting to rise.
Gramley and other economists said the release of the study paper did not change their view that the Fed probably will start raising rates when the Open Market Committee meets on Aug. 20, based on the report Friday showing that the unemployment level dipped to a six-year-low of 5.3 percent in June. But they said Greenspan almost certainly would be quizzed about the study July 18 when he makes his midyear report to Congress on the state of the economy.
``Operationally, I doubt that this paper is being taken seriously,'' said Allen Sinai, chief global economist at Lehman Brothers in New York. ``To wait until a recession to really go after inflation is not an inflation-fighting stance a central bank would want to take.''
LENGTH: Medium: 76 linesby CNB