WASHINGTON -- Alan Blinder, President Clinton's choice to fill a vacancy on the Federal Reserve Board, sought to defend himself Friday, against charges that he is soft on inflation.
In his confirmation hearing before the Senate Banking Committee, Blinder said inflation is not a near-term threat, but he also made a lot of statements that Fed Chairman Alan Greenspan and his colleagues would not dispute.
"Growth is good for the economy and the country as long as it doesn't get to the point where it starts tripping off inflation," Blinder told the panel.
The committee also heard testimony from Steven Wallman, Clinton's pick to fill out a three-year term on the Securities and Exchange Commission created by the departure of Edward Fleischman.
The Senate is expected to approve both nominations without any glitches, but Blinder probably will not be appointed to succeed former Fed vice chairman David Mullins until after the May 17 meeting of the Federal Open Market Committee, aides said.
Blinder took the unusual step of reading a detailed and analytical opening statement giving his views on the economy and monetary policy. The former Princeton University professor and news columnist also wrote it in plain English instead of the ponderous jargon commonly used by officials.
"There is simply no good reason to push the economy beyond its normal capacity and into the inflationary zone; any job gains we enjoyed in the short run would be balanced by job losses later," said Blinder, who is currently a member of the President's Council of Economic Advisers.
Blinder said that he supports the Fed's goal of achieving zero inflation, but he pointed out that Greenspan and many economists believe the government's consumer price report overstates inflation by between 0.5% and 1.5% per year. And, he said, finding the exact price measures is a debatable exercise.
Blinder said he would like to achieve price stability, which he defined as getting to the point, "when people stop talking about inflation." The United States, he said, "now looks to be close to, but not quite at, stable prices."
Testifying after the Labor Department reported that the jobless rate in April fell to 6.4% from 6.5%, Blinder said he does not believe the Fed's charter from Congress to maximize employment means lowering rates until everyone has a job. Instead, he said, it means adjusting policy to achieve what economists call "the natural rate of unemployment," which he did not define. Most economists suggest labor pressures would start to build when the jobless rate gets down to a range of 5.5% to 6%.
Blinder admitted he was surprised by the recent jump in long-term interest rates since the Fed began tightening credit. He attributed most of the increase to evidence that the U.S. economy is growing more strongly than expected early in the year, pushing up demand for credit. Heightened inflation fears are less of a factor, he said.
The real debate for monetary policy is not the near-term outlook for inflation, Blinder said, but what will happen to prices a year or two from now as the slack in the economy disappears. On that issue, he described himself as an "agnostic," but he said he does not share the fears of some analysts that the economy will start overheating "a year or 15 months from now."
Blinder offered some criticism of the Fed, but not for its direct conduct of monetary policy. "The Fed could have done a better job than it has of articulating its mission," lately, he said, an apparent reference to their reasons for this year's increases in short-term rates.
He said he supported the central bank's decision to announce its rate increases, adding that he hopes "it will become a permanent part of the Fed's operating procedures."
Blinder said that if he is appointed, he will make a point of studying the issue of whether derivatives pose a systemic risk to financial markets. At the same time, he said he does not always believe that government regulation is a solution in dealing with an issue.
Wallman also said he believes derivatives must be studied for their possible risk to the marketplace, but he said he believes in many cases they are helpful by allowing investors to hedge risk. Any regulatory changes must be made with an eye on what foreign authorities are doing, he told the panel.
