Washington Looks To Fed to Shore Up Flagging Economy

STOCK market prices are diving. Inflation is rising. Housing starts have fallen for six months in a row. Economic growth is down, perhaps even to recession levels. It's time for Federal Reserve Board chairman Alan Greenspan to slip into a telephone booth, emerge as a monetary superman, and come to the rescue. That's a view rapidly gaining popularity in political Washington and among economists.

``If something is to be done in a hurry, it will have to be done by the Fed,'' says Joseph Minarik, executive director of the Joint Economic Committee (JEC) of Congress.

``The risks of a recession are much greater than those of inflation,'' asserts John Winthrop Wright, manager of some $4 billion in financial assets. ``Fed officials aren't fulfilling their function of financial economic leadership of this country. Nothing has been done to change the downward movement of our economy. It's dreadful, dreadful. We will have a depression.''

Most economists do not have nearly as gloomy a view as the chairman of Wright Investors Service in Bridgeport, Conn., has. Indeed, most expect the Fed to ease monetary policy at some point in the next few months. For example, Roger Brinner, chief economist of DRI/McGraw-Hill, an economic consulting firm in Lexington, Mass., predicts that the Fed will lower a key interest rate, the federal funds rate, to 7.5 percent by the fourth quarter from 8 percent at present.

``The Fed will come under heat if they don't respond,'' he says.

With the combination of weaker statistics and the rise in oil prices as a result of the Iraqi takeover of Kuwait, economists have been marking their forecasts down sharply. A group of 49 economists, surveyed by Robert Eggert of Blue Chip Economic Indicators (Sedona, Ariz.), predicted early in July that national output would grow 1.9 percent this year and 2.2 percent in 1991. The same group's latest consensus now puts growth this year at a flabby 1.3 percent and next year at 1.7 percent.

Mr. Eggert says this is the second biggest monthly nose-dive in the consensus since he started the surveys 13 years ago. The only bigger downward adjustment in these forecasts followed the October 1987 flop in the stock market. On that occasion, the consensus forecast proved decidedly too pessimistic for 1988.

Today's predictions are similarly at hazard because of the uncertainties arising from the Iraqi crisis. Will the crisis worsen, pushing up the price of crude oil further? Or will it be settled, allowing the price to fall back?

Even before the Iraqi invasion, economic weakness prompted the White House to urge an easier monetary policy. Michael Boskin, chairman of the president's Council of Economic Advisers, was quoted as saying the Fed should be prepared to act ``if signs develop that the economy is not going to be improving.''

Referring to elections in November, the JEC's Mr. Minarik notes: ``Members of Congress, almost to a group, do not want to go home and campaign in a recession.'' But he expects criticism of the Fed to be moderated by its ``good track record'' in keeping the present economic expansion continuing for almost eight years.

One byproduct of the weak economy, Minarik notes, could be that President Bush and Congress agree on a ``less rigorous'' reduction in the federal deficit for fiscal year 1991, starting Oct. 1, than the $50 billion called for in an earlier tentative deal. Washington would be afraid of worsening the slowdown with a tight fiscal policy. The deal would probably call for larger deficit reductions during the four fiscal years following 1991 to make up for the small '91 cuts.

Another side-effect has been a smaller US trade deficit. The June deficit of $5.07 billion was the smallest in seven years.

Minarik sees the Fed as being ``in kind of a box.'' This is because the slowdown in the economy has not yet produced a decided decline in inflation. Consumer prices rose 0.4 percent in July, the Labor Department reported last Thursday. So inflation rose at an annual rate of 5.8 percent in the first seven months of 1990, even before the recent dramatic rise in oil prices.

Some Fed policymakers have set a goal of ``zero inflation,'' usually meaning inflation so low it doesn't enter into public investment and purchasing decisions.

Mr. Wright charges that such a zero goal is ``crazy'' when business and consumers are saddled with current high debt levels. He expects stock prices to plunge another 10 to 20 percent before starting to recovery late next year ``at the earliest.''

Allan Meltzer, an economist with Carnegie-Mellon University, is concerned the Fed will go too far in easing monetary policy in an effort to offset the drag of higher oil prices. ``It should not make the mistake of 1973-74 by printing money to make up for the shortage of oil,'' he says.

Nonetheless, Dr. Meltzer would like the Fed to restore the growth in the nation's money supply to its target of 3 to 7 percent for M2, a measure of money that includes currency, checking deposits, and most savings deposits. In the past three months, M2 has grown at an annual rate of 1 percent, and in the past six months 3.5 percent.

To some economists, Mr. Greenspan is too late in donning his cape. Richard Hoey, chief economist of Barclays de Zoete Wedd, a financial institution, says the recession has already begun: ``The role of the Fed is damage control - to try to minimize the downside.''