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Biggest Risk: Recession

FEDERAL Reserve Board Chairman Alan Greenspan has a reputation for being a ``gradualist.'' That's being demonstrated in the easing of monetary policy this year to combat the economic slowdown. Short-term interest rates are being cut by one-quarter of a percentage point - a baby step - at a time. Today's target of 7.5 percent is down from 8.25 percent early this summer. The Fed, of course, has its reasons for being cautious. It doesn't want to revive inflation. Nor does it want to weaken the United States dollar excessively by depressing interest rates sharply while interest rates in Japan and Germany have been rising.

We believe, however, that at this time the Fed could afford to be bolder. It should be making certain the recession, if it is one, remains mild. With so many individuals and corporations holding excessive debt burdens, the economy stands on a somewhat shaky foundation. A sharp recession could prompt more bankruptcies, unemployment, and other economic troubles than necessary to restrain inflation.

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In the three months after Iraq invaded Kuwait, higher energy prices boosted the consumer price index at an annual rate of 8.9 percent, up from 4.4 percent during the prior three months. If energy is excluded, however, that index rose only 4.5 percent, down from 5.2 percent in the previous three months.

Further, the cost of home ownership has risen at an annual rate of 3.1 percent in the most recent three months, down from an 8.4 percent rate in the previous three months. The slowdown seems likely to reduce house prices in the months to come. And the slump could finally put a crimp in the rising cost of services.

Nor can the Fed be accused of printing too much money. The nation's money supply, as measured by M2 (currency in circulation, checking deposits, plus some savings), has grown only 4.7 percent over the past 12 months. Minus inflation, the real money supply has not grown at all.

Fed policymakers have been divided over whether the central bank's top priority at this time ought to be fighting inflation or reviving economic activity. The record of the Oct. 2 meeting of the Federal Open Market Committee, the central bank's top policymaking group, shows that three of the 12-person group, Wayne Angell, Lee Hoskins, and Robert Boykin, feared that the Fed ``risked losing sight of its fundamental objective of controlling and ultimately bringing down inflation.'' A fourth, Martha Seger, wanted a much more vigorous move to ease credit. The remaining FOMC members approved the mini Fed funds cut.

We agree with Ms. Seger at this time. Canada, Britain, and Australia are probably entering recessions. Banks are lending only cautiously, scared by regulators and past troubles. One report says Fed policymakers have been considering cutting reserve requirements to encourage banks to lend more. If that's the best route to stimulating economic activity, the Fed should do it. The key risk now is too deep a slump.

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