As Economy Revs, Fed May Fine Tune

The United States economy is having its best run in the last 30 years - and the good news is that the pace may last into the next century.

"If the Fed can prevent inflation, then the current expansion could break the nine-year record set during the 1960s," note Roger Brinner and David Wyss, economists at DRI/McGraw-Hill, a consulting firm in Lexington, Mass.

In fact, the economy looks so chipper that a cautious Federal Reserve chairman, Alan Greenspan, and other Fed policymakers may well decide today to dampen the zest a little by raising short-term interest rates 0.25 percentage point.

Economists do not expect a slight tightening in monetary policy to bring an end to the current economic expansion, which is this month marking its sixth anniversary.

"Recoveries don't die of old age," says Joel Prakken, chief economist of Macroeconomic Advisers, a St. Louis consulting firm. "I see no reason why it can't go on for a while."

Still, investors are jittery about even a slight tap today on the nation's economic brakes. After Mr. Greenspan hinted last week that rates would rise, investors pushed stock prices lower and interest rates on bonds higher. A hike also means car and home buyers could face more costly loans.

Even with an interest rate hike, economists are optimistic about the durability of this expansion.

"There is no reason we couldn't go for nine or 10 years to come," says Raymond Worseck, chief economist for A.G. Edward & Sons, a St. Louis brokerage house.

But he does see a possibility of a "growth recession" next year - if the Fed hikes interest rates. In a growth recession, the economy slows pushing up unemployment rates, but output does not shrink as in a full recession.

"We have not done better since the early 1960s," notes Allan Meltzer, an economist at the University of Pittsburgh.

Factors economists find pleasing about the expansion today include solid growth in output, low inflation, reasonable interest rates, rising wealth with higher stock and house prices, a relatively low federal deficit, and rising real wages - at last.

The "misery index" - the unemployment rate plus consumer price inflation - is at its lowest level since the early 1970s. Measures of consumer confidence are at a high level.

"There are no imbalances to immediately threaten the life of the recovery," says Mr. Prakken.

Maureen Allyn, chief economist at Scudder, Stevens & Clark Inc., a New York mutual fund group, gives the economy "straight 'A's' except in one course - debt management by the household sector."

Whereas companies have reduced their debt burdens, many consumers with modest incomes have piled up debts to uncomfortable levels. More than 5 percent of credit-card balances are being written off by lenders. That compares with not much above 3 percent in late 1994. Personal bankruptcies have soared.

Other weaknesses seen by economists include greater income inequality, continued high unemployment among black teenagers and in urban ghettoes, and disappointing growth in productivity.

The expansion has been moderate. Gross domestic product after inflation has grown 15 percent in its six years. That compares with an average 25 percent in the four previous relatively long economic expansions, notes Kurt Karl, an economist with the WEFA Group, consultants in Eddystone, Pa.

Making a similar point, Mr. Worseck points out that growth in output in 25 percent of the quarters in this expansion have been at annual rates of 1 percent or less. The worst such previous record (since 1961) was in the 1975-79 expansion when real output rose 1 percent or less in 11 percent of the quarters.

"This has not been the best of times ... but rather good times," he says.

"The weakest growth rate of any postwar expansion," note Messrs. Brinner and Wyss.

But there are now concerns in the Fed and among some economists that the economy is too robust to keep inflation dormant long.

Last Thursday, in testimony to the Joint Economic Committee of Congress, Greenspan said that inflation at present is "quite benign." But he also spoke of the possibility that inflation may accelerate later this year or in 1998. And he again vowed to act "promptly - ideally preemptively - to keep inflation low."

The last time the Federal Reserve altered interest rates (down a quarter of a point) was on Jan. 31, 1996.

The two DRI economists maintain a two-step Fed tightening (a quarter of a point now, a quarter-point later this year) in the Fed funds rate would be "useful."

"If the Federal Reserve fails to raise interest rates, it would risk losing the confidence of bond investors, who rely on it to control inflation," they maintain.

Professor Meltzer also calls for Fed action. He is concerned by a modest acceleration in the growth of the nation's money supply - the cash, checks, and other means by which people pay their bills. If this continues it could lead to rising rather than falling inflation, he says.

Contrariwise, Prakken finds "no compelling reason" for the Fed to raise interest rates. He predicts that the economy will slow to a sustainable pace on its own.

Mr. Worseck says the Fed might be justified in holding off boosting interest rates "to May at least." He says the latest inflation numbers indicate no present danger of accelerating prices. Also, Greenspan has already achieved his objectives: Stock prices are down and interest rates up.

"Why kick a dog when it's down," he says.