Greenspan Economic Sequel: Return of the Inflation Buster

Federal Reserve chairman Alan Greenspan is America's economic pessimist-in-chief. He frowns when everyone else is smiling. He puts his foot on the monetary brake just when output starts humming. He senses inflationary pressures behind every twitch in the economy.

Despite some opposition from politicians and businessmen who want the economy to grow faster, the owlish central banker is likely to win easy reappointment to his powerful post today - and redouble his efforts to quash inflation.

Mr. Greenspan will get to keep his job because President Clinton and the Congress want to keep the financial markets happy. His fan club extends through the stock and bond markets where stability is considered the most important ingredient. Over the past three years, Greenspan and the Fed have kept the economy growing and inflation low. Fed watchers now expect he will concentrate on reducing inflation even further.

The central banker will get little argument from the two new members, Alice Rivlin, the new vice chairman, and Laurence Meyer, both respected economists who will also be voted on today.

Changes in Federal Reserve policy are often discernible only to keen observers. For example, the Fed has apparently decided that the 5.6 percent unemployment rate does not constitute an inflationary threat.

"We're experimenting with a lower unemployment rate than anyone thought possible two years ago," Lawrence Lindsey, one of the bank's governors, recently said. In the past, a 6 percent rate was considered an acceptable rate.

If the Fed continues to believe the experiment is working, it is not likely to make any interest rate changes when its Open Market Committee meets on July 2 to 3. "They have dropped some strong hints they do not intend to do anything at the July meeting," says senior economist Christopher Low of Hongkong & Shanghai Banking Corporation.

Changing the Fed's culture

Under Greenspan, the Fed has become more open about these meetings. It sometimes even releases a statement announcing what actions it decided on. The actual minutes of the meeting won't be released until Aug. 23. But later in July Greenspan will testify before Congress. "He will spill the beans," says Mr. Low.

Fed watchers don't expect any major shifts from Greenspan. Mickey Levy, chief economist for NationsBank, anticipates the Fed will try to lower inflation below the current 2.8 to 3 percent annual rate.

"What is the goal?" asks Mr. Levy, who answers, "Certainly below 3 percent."

It appears the Fed's actions are working. There is little sign of inflation expectations in the economy. In Bethlehem, Pa., Linda Cameron is always looking for bargains to feed and clothe her teenage children. But, she admits, there is no item she and her husband Doug are stocking up on in anticipation of higher prices.

"I guess things are fairly stable," she says.

Susan Walker, a resident of Hattiesburg, Miss., says she's not concerned about the small price increases she sees in the grocery store. "I want a little raise and I know those workers do too. It's the big items that really get you," she explains.

One of those big items is lumber, since she is planning to build a new house next year. And, if mortgage rates rise to 9 to 10 percent, she says, "I just won't move."

View from Fred's auto body

With consumers expecting stable prices and shopping for bargains, businesses are finding they have little ability to raise their prices. "Business is soft so I have mechanics willing to work for half pay," says Freddy Bonet, who runs a collision repair shop on New York's upper east side.

This is exactly what the financial markets are hoping for. The stock market has been moving in historic territory since the beginning of the year. And, even though long term bonds are now yielding over 7 percent, the financial markets are generally stable.

The reaction of the financial markets is important to the Fed members who watch the gyrations closely. Immediately after the 1987 stock market crash, for example, the Fed calmed the markets.

The Fed also keeps a close check on foreign markets. Two years ago, when the peso was collapsing, the Fed worked to stabilize the currency markets. Then last year, it said it would lend money to the Bank of Japan, which was in the midst of its own banking crisis. "This calmed the markets in Japan," recounts Low. Part of the Fed's motivation was to prevent a panic from spreading to the US.

Fed members also bury themselves in economic data trying to better understand the information.

"They need to make phone calls and gather intelligence from a wide variety of sources," says William Poole, a professor of economics at Brown University and a former member of the Council of Economic Advisors. Some of this information appears in the Fed's release of the "Beige Book," which analyzes the economy region to region. The latest Beige Book was released yesterday.

Even though the Fed governors appear to operate in an ivory tower atmosphere, they have regular meetings with bankers and business leaders. "They may complain about the constant stream of people passing through their offices," says Mr. Poole. "Their problem is sorting out those giving good information and those who are wasting your time," he adds.

Where Fed gets information

The Fed governors count on the presidents of the district banks to give them good anecdotal information. For example, yesterday the Chicago Federal Reserve hosted a economics round table.

"They have economists from industries in their region to discuss what is going on in their companies and industries," says Paul Kasriel, an economist with Northern Trust Company in Chicago. Mr. Kasriel, who has attended many of the meetings, says the Fed governors are curious people. "They are regular guys and gals - some are human beings not all are economists," he jokes.