So, is the Fed going to tighten? Not very soon, these experts think

THE BALTIMORE SUN

THE ECONOMY, about to enter its seventh year of expansion, booked a good 1996 and showed signs of speeding up at the end of the year.

Often this is just when the Federal Reserve starts tightening the money supply to prune inflationary sprouts. An accelerating economy, especially late in an expansion, is often fertile ground for price growth.

A smaller money supply tends to cause higher interest rates, and last week's gyrations on Wall Street were driven in no small dose by fears of inflation and higher rates. Fed Gov. Susan Phillips stoked the anxiety Thursday by saying the Fed is at a heightened state of alert for inflation.

But inflation has been dormant much longer in the 1990s than many economists expected, and some are saying that the danger of higher prices has abated.

Fed Chairman Alan Greenspan also spoke publicly last week about inflation, in testimony before the U.S. Senate. What did that reveal? Will he tighten the money supply or wait and see?

David Berson

Chief economist, Fannie Mae, Washington

As usual, there was something for everybody in there. I looked through my clippings today, and some writers are saying Greenspan's statements indicated the Fed would be more hesitant to tighten because core inflation was low. Then there were those who said the Fed is leaning toward tightening because wages are starting to go up.

And that's exactly the reaction Greenspan wants. He doesn't want you to know what he is going to do.

What do I think he said? I think he said that he doesn't think they're going to have to raise rates, at least in the near term. But if wages accelerate more quickly or if the acceleration in wages finds its way into prices, they're prepared to tighten. But neither of those things has happened yet.

Most people have been surprised that core inflation moved down still more last year, despite wages starting to edge up. The Fed is not against wage increases. The Fed is against price increases. What we want is wage increases without price increases, because then real incomes go up.

Ed Yardeni

Chief economist, Deutsche Morgan Grenfell/C. J. Lawrence, New York

Mr. Greenspan in effect said that he is very pleased with the

performance of the economy. In other words, there is no reason to expect any change in Fed policy. Economic growth has been stronger than most economists expected, yet inflation remains subdued. He said that, "In fact, by some important measures of price trends, inflation actually slowed a bit in 1996."

Most importantly, in our opinion, Mr. Greenspan said that he believes that productivity must be growing much faster than measured. The Fed chairman seems to understand that this bTC underestimated productivity theory explains three puzzles: (1) The coexistence of robust growth with low inflation; (2) the lack of cost-push inflationary pressures on prices even though wage gains are rising; (3) solid profits growth with no pricing [pressure].

David Donabedian

Senior vice president, Rothschild/Pell/Rudman, Baltimore

It was a typical Greenspan speech. Every sentence contradicts the one before it. You sort of marvel at his ability to do that and still sound intelligent.

But I came away with a couple things. I think they're still in a wait-and-see mode. And I think they'll be there at least through the next Federal Open Market Committee meeting, which is coming up the first week in February.

Everyone focused on his comments about wages, and that's where he wanted people to focus. It gives you a clue about what things they're looking at and what might change their minds.

The employment cost index that comes out [Tuesday] was a previously little-followed statistic. What it does is track not just wage-cost pressures, but also employee benefits. But Greenspan has made comments that this is the best of all measures of wage pressures, so it's suddenly followed very closely. But, until they see a meaningful acceleration in wage costs, I think they're inclined to stay pat.

Christine Chmura

Chief economist, Crestar Bank, Richmond, Va.

I would not take Greenspan's testimony as strong indication that we won't see a tightening this year. I think you can come to another conclusion as well. To me, he was opening the door, more so than he has in the recent past, to tightening.

Early in his testimony, he spoke about wage gains having become more sizable. And at some point in time, the forces constraining the wage gains may lift. To me, he was preparing the market for the possibility of tightening later this year.

It is remarkable that we're in the sixth year of this expansion. There are few signs of imbalances. Inflation remains contained. Yet the one point that continues to worry people is that we hear anecdotal reports of wage pressures. We hear it, but we haven't seen it in the numbers.

Pub Date: 1/26/97

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