FEDERAL Reserve System policymakers stand in danger of crossing the line between being courageous and being foolhardy. In their battle against an old enemy, inflation, they have held their monetary fire until more than the whites of the eyes of another enemy, recession, are visible; they are staring a slump in the face. Last Friday, the Labor Department reported that job growth in the United States has come nearly to a halt. Unemployment notched up a tenth of a point to 5.6 percent, the highest since August 1988. The day before the Commerce Department said businesses plan to increase spending for new plants and equipment by 5.1 percent this year over 1989. That number, after excluding inflation, is about the same as in 1989. After-tax corporate profits fell two-tenths of 1 percent in the second quarter of this year.
During the April-June quarter, the nation's output of goods and services rose 1.2 percent in real terms. It was the fifth quarter that the economy has been growing at a rate less than 2 percent in inflation-adjusted terms. There have been only two periods when the economy was so sluggish for such a long time in the entire post World War II period, and both of these previous episodes were sharp recessions.
The near doubling of oil prices as a result of the Iraq invasion of Kuwait has led many economists to mark down their forecasts, with some forecasting recession.
It could be the Fed is waiting for the Bush administration and the Congress to reach a budget deal. The Fed could then say that a tighter fiscal policy justifies a looser monetary grip.
Or it could be the Fed has been waiting for a moderation in wage hikes to a less inflationary level. They now have that. Average hourly and weekly earnings each rose a modest two-tenths of 1 percent in August, compared with jumps of six-tenths of 1 percent in July.
In some ways, the Fed can be admired for its determination to fight inflation. It has kept interest rates relatively high, despite complaints by home builders and others. It has limited the growth in the nation's money supply to an annual rate of 1.6 percent in the last three months, 3.2 percent in the past six months. After knocking off inflation, real money - the fuel for the economy - has been shrinking. That's a tough monetary policy.
But the Fed should remember that once the new enemy, recession, actually gets into the trenches, it is harder to defeat. It would be better to loosen up a little now.