WASHINGTON Federal Reserve officials know what they are doing when they adjust interest rates even though government economic statistics are often flawed, Fed chairman Alan Greenspan told a House subcommittee yesterday.

"Recognizing that economic understanding is imperfect and measurement is imprecise is not a reason to despair about conducting monetary policy," Greenspan said in an unusual appearance before the Government Operations Committee's subcommittee on consumer and monetary affairs. "Imprecision in published data on the macroeconomy does not pose a crippling hardship."

There has been mounting interest in Congress about the accuracy of the economic statistics issued by the Labor Department and other federal agencies. The reports not only guide policymakers but often influence daily trading in financial markets.

Economists say, for example, that the consumer price index overstates the change in the cost of living by as much as 1.5 percentage points, which would mean that instead of rising 3% a year, inflation may only be rising by half that.

In addition, many statistics issued each month or each quarter by the government -- from personal income to gross domestic product and international trade are subject to large revisions. Revised GDP showed that the recession under President Bush from 1990 to 1991 was more severe than first believed. and the recovery turned out to be much stronger than the early statistics indicated.

Greenspan said Fed officials have not been misled in setting interestrate policy because they are aware of the problems with the various statisncs and rely on a "whole spectrum" of reports as well as anecdotal information from different sources. Moreover, he told the panel, the Fed sets policy based on a collective judgment of what is likely to happen in the future rather than reacting to information about past economic activity.

While the CPI and other price measures overstate inflation, Fed officials recognize that prices tend to rise "only as the business cycle, matures," Greenspan said. Officials tend to watch signals from financial and commodity markets for early warning signs of inflation instead of the traditional government statistics on prices, employment, income, and the money supply, he said.

However, the panel also heard testimony that the Fed and other policymakers have been misled-by bad statistics made worse by budget cutbacks and an inability on the part of government to keep up with a rapidly changing economy.

"We believe that these reductions and data quality problems can cause significant errors in policy. These errors m turn can be very costly to the U.S. economy," said David Wyss, research director for DRI/McGrawHill.

Revised statistics "showed a far weaker economy during the 1987 to 1989 period" than originally believed, Wyss said. "It seems clear in retrospect that the Federal Reserve was much too tight during that period."

The original dam showing a mild recession in 1990 and 1991 may have led Fed officials to stick to a policy of lowering interest rates slowly, Weiss said. And, he suggested, "that data may well have cost George Bush the election in 1992."

Wyss disputed Greenspan's view that the Fed can safely forecast the future using flawed statistics. DRI analysts have found that half of the error m their economic forecasts came from errors in the government data.

However, Greenspan told the panel he doubted .that Fed officials would have done anything differently in response to the recession and the Gulf War. "I remember that period quite well," he said, and he noted that the Fed had already begun to ease rates in the spring of 1989 in response to the credit crunch.

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