Caution at the Fed

ALAN GREENSPAN has a reputation as a cautious man. So far that image is justified. Before Mr. Greenspan assumed chairmanship of the Federal Reserve Board in the summer of 1987, there were often wide swings in monetary policy. The Fed would brake hard to prevent inflation from accelerating, and then pump up the nation's money supply drastically to reverse any ensuing recession. As a result, the business cycle swung to extremes that were probably avoidable. But Greenspan and his colleagues at the Fed have shifted monetary policy in small, incremental steps. This policy moderation promises milder business booms and busts.

Since last June the Fed gradually eased monetary policy to avoid a recession. It took another such baby step last week when it injected reserves into the banking system, driving down short-term interest rates. Economists are debating whether the Fed's move will be sufficient to prevent a recession. But most reckon it should prevent any slump from becoming serious.

The Fed's ultimate and worthy goal is to reduce inflation to zero - or at least close enough to this point that businessmen and others no longer factor inflation into their economic decisions.

But the Fed would like to reach that goal without a serious recession. A downturn could badly jar many companies, especially those laden with debts. It would boost unemployment and worsen the federal budget deficit. And it could weaken the political prospects of the Republican Party. Most Fed policymakers, it might be noted, were appointed under President Reagan.

Greenspan's inclination to be cautious will prove most useful if he persuades his colleagues not to press the money accelerator too hard should the economy prove to be in a modest recession.

If the Fed allows the money supply to run away, it could be battling inflation again in a year or more. The 0.4 percent increase in producer prices in October, announced last week, was one indication that the Fed must make sure inflation does not get out of the bag again.

You've read  of  free articles. Subscribe to continue.
QR Code to Caution at the Fed
Read this article in
https://www.csmonitor.com/1989/1114/eecon.html
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe