WASHINGTON -- It didn't take long for the name-calling to start after President Clinton picked Alan Blinder to be vice chairman of the Federal Reserve.
Wall Street analysts worried that they had a Mr. Softee on inflation in Binder, a liberal Democrat who spent most of his career teaching economics at Princeton University before he became a member of the President's Council of Economic Advisers.
Critics warned that the Fed -- loaded with Republican appointees dating back to Ronald Reagan -- was going to be tainted by a pro-growth do-gooder willing to grease the skids of the economy with easy money.
Well, Alan Blinder has been on the job about six weeks, and the republic is still standing. In an interview in his office, the 48-year-old economist from Brooklyn, N.Y., said he is comfortable with his new duties and is prepared to let his record speak for itself without worrying about armchair critics.
"I'm thick skinned," he said. "I expect these kind of things. It goes with the territory, and it only bothered me when it got unfair."
Still, Blinder conceded that he felt obliged to go out of his way to define his views on fighting inflation by preparing a detailed opening statement for his confirmation hearing before the Senate Banking Committee.
"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," Blinder told the committee in May.
He will have a chance to put those views into practice as one of 12 voting members of the Federal Open Market Committee, which meets next Tuesday. There are widespread expectations in the bond market that officials will vote to tighten credit again to tap the brakes now that a strong economy has just about run out of slack.
Blinder said he believes the economy seems "to be downshifting slightly" from a growth rate of 3.5% to 2.5%, approximately the pace that he believes can be sustained over the long term without igniting inflation. But he said that these days reading the statistical tea leaves is a tricky task, one fraught with conflicting signals.
"There are some parts of the economy that are not evincing any evidence of really slowing down," he said. "Certainly the manufacturing core of the economy is not. There are other sectors of the economy that are giving out strong indications of a sizable slow-down, but not of a contraction, like the housing industry."
Blinder's view that the economy's so-called potential growth rate is around 2.5% places him in the main-stream of most economists. The same can be said for his view that the natural rate of unemployment -- the level that can trigger wage pressures -- is about 6%, or slightly lower.
The challenge facing the Fed is that strong growth in the last nine months has brought the economy close to capacity, and there are doubts that the economy will slow to a more moderate pace in the second half of the year.
"I think it's a close call. That's exactly what we're wrestling with right now," Blinder said. "We're watching all the official data that come in, and we're watching whatever anecdotal evidence we can get our hands on to make exactly that judgment."
In his July testimony to Congress, Fed chairman Alan Greenspan said officials will be paying close attention to anecdotal reports from business about price and wage pressures. Indeed, the recent beige book report prepared for next week's FOMC meeting was chock-full of references to spot labor shortages and higher prices for materials used by manufacturers.
Blinder, however, cautioned that anecdotal reports do not capture what is going on in the whole economy, and he seemed mildly upbeat that inflation is not getting out of hand.
"It's quite quiescent," he said. "There are a few little cinders here and there that don't look like they're about to ignite a fire, but they're burning. Most of those cinders have to do with prices of commodities, so that's an area that needs to be watched closely."
Blinder said he sees "very, very few" wage pressures outside the construction industry, where Fed officials have detected shortages of machinists and some other types of skilled labor. And construction is slowing down because of this year's run-up in interest rates, he noted.
"What is true is that what had been downward pressure on wage increases for a long time seems to have dissipated," said Blinder. "The process of several years of ever-falling wage inflation seems to have run out, and we look to have been for some time now in a period of fairly stable wage inflation, in the range of 3%, perhaps a little bit more."
Blinder is aware of private forecasts calling for a small upturn in inflation in the months ahead. But any increase, he said, is likely to show up mostly in energy prices because consumers will not get the benefit of falling oil prices the way they did earlier in the year.
Blinder said he supports Greenspan's attempt to set policy preemptively, given the lag of a year or more between changes in interest rates and their impact on the economy. "The fine line that we need to draw is between acting preemptively, which we need to do and want to do, and acting precipitously -- that is, shooting at shadows in either direction," he said.
Currently, the economy does not seem too far away from a 6% unemployment rate and a growth rate of approximately 2.5% -- conditions that are likely to prevent an upturn in inflation, Blinder said. "I feel the economy is close enough to gliding into that kind of path, and as long as monetary policy doesn't lurch too much in one direction or another -- and I don't think we will -- we have a fairly good chance," he said.
