The Fed's Policy Wisely Looks Ahead

The editorial ``Holding Inflation at Bay,'' March 25, unfairly criticizes the Federal Reserve Board's recent actions to restrain inflation. Contrary to the editorial's claims, these actions were justified and necessary.

The claim that inflation is not a threat is not supported by valid evidence. You mention the current inflation rate, but because of the time lags in monetary policy the current inflation rate is determined by monetary policy from a year or more ago: It tells us where we have been in the recent past regarding monetary policy, but not where we need to go. Using the current inflation rate to guide monetary policy is a prescription for disaster.

There are many indicators of building inflationary pressure, which give policymakers legitimate cause for concern. First, the monetary base has been growing at 9 to 10 percent for the past two years, and bank reserves have been growing at a similar rate. Monetary growth this rapid can only result in inflation much higher than the current 3 percent rate.

Second, the prices of gold and silver futures indicate that investors expect inflation to rise significantly over the next four or five years. Consumer surveys taken by the University of Michigan confirm this expectation.

Third, many commodity prices have sharply increased in the past year. Contrary to your claim, the price of gold has increased 17 percent in the last year, surely a ``significant upward spike.''

The argument that the Fed should emphasize short-run growth, rather than the long-run goal of stable, low inflation, is disturbing. The experience of the past 20 years shows that monetary policy is very ineffective at generating economic growth (recall the stagflation of the late 1970s). Also, you implicitly argue that the Fed ought to base its policies on political concerns.

The primary goal of the Fed should be to keep inflation stable and as close to zero as possible. The best thing the government could do to promote growth is to adopt growth-oriented fiscal policies and to eliminate burdensome regulation of business. Mark Wylie, Los Angeles

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