Slow US Economic Gains Have Economists Dickering Over Best Course for the Fed

THE United States economic recovery putters along like an antique car on a freeway.

With President Bush facing reelection, the merely modest expansion makes the White House nervous. Both Michael Boskin, chairman of the Council of Economic Advisers, and Treasury Secretary Nicholas Brady last week called for greater monetary easing by the Federal Reserve.

Their comments have renewed a debate among economists and in the bond markets as to the correctness of Fed policy.

Sam Nakagama, a Wall Street economist, holds that administration officials "have to be uncomfortable about the fact that the current situation shows a lot of similarity to what happened in the economy a year ago."

After the economy emerged from a recession last spring, the recovery nearly faded away in the fall. But output this year has been growing at an annual rate between 2 and 3 percent. Revised figures for gross domestic product will be released May 29.

Mr. Nakagama has been concerned that weak automobile and housing sales, plus slow growth in a broad measure of money (M2), will hold back the recovery again.

Other economists are less worried. "We are in wonderful shape," says Rudiger Dornbusch, an economics professor at the Massachusetts Institute of Technology. He predicts economic growth at about a 3 percent annual rate over the next year.

"The Fed can't do more," he says, because it takes as much as a year before any extra monetary stimulation boosts economic growth. Referring to rapid growth in bank reserves in recent months, he adds: "The bread is in the oven and you have to wait for it to bake."

Federal Reserve officials themselves apparently are satisfied with their present path. A report in the Wall Street Journal a week ago said the Fed's policymaking Open Market Committee May 19 had decided against any immediate cut in short-term interest rates. Nonetheless, Fed chairman Alan Greenspan still has the leeway to cut the Fed's federal funds' interest-rate target as much as 1/4 percentage point if economic data warrant, the Journal noted. Federal funds are money that commercial banks lend each ot her overnight.

Mr. Boskin himself said that the administration will revise upwards its January growth forecast of 2.2 percent for 1992.

Beryl Sprinkel, chairman of the Council of Economic Advisers under President Reagan, sees some encouragement in the fact that M2 (currency, checkable accounts, some savings deposits) has grown again for the last two measured weeks. Like most economists, he regards money as the fuel for the economy. If that M2 growth ceases, he says, the Fed should drop short-term interest rates again.

Dr. Sprinkel praises Mr. Greenspan for keeping money growth "less volatile" since taking office in 1987. He says monetary policy was "modestly too tight" in the years 1988 to 1990, causing the recent recession. That slump, however, has reduced inflation. He expects consumer prices to be increasing at a modest 2.5 to 3 percent annual rate by the end of this year. The Fed, he warns, shouldn't undo it now by rapidly increasing the money supply.

"We have paid the price," he says. "Let us enjoy the benefits."

The long-run health of the economy, Sprinkel says, is damaged by the rapid growth in federal spending - almost 10 percent a year in the last three years - and the resulting budget deficits.

Professor Dornbusch says he figures that economic growth will run around 3 percent for the rest of the year. He expects that to be adequate to get President Bush reelected.

"The `political business cycle' is alive and well," he says. "The government's ability to manage the economy, within limits, virtually guarantees that the economy will be used to win elections."

However, the economic models now predicting Bush's reelection are based on the electorate's past behavior, he cautions. They don't take into account the possibility of a genuine three-way race that includes Ross Perot. Dornbusch says another unknowable is the impact of the "major redistribution" of income up the ladder in the past decade.

Michael Cosgrove, a University of Dallas economist, regards monetary policy as "accomodative."

As a result, he is more optimistic than most economists, anticipating growth in the second year of this current economic expansion at 3.4 percent (measured from the first quarter of 1992 to the first quarter for 1993). That would be somewhat below the 4.3 percent average growth in the second year of the previous four economic recoveries.