WASHINGTON - Federal Reserve Board Governor Edward Kelley yesterday dismissed bond market worries over inflation and said the economy will probably expand modestly in the months ahead.

Kelley's comments seemed to be more relaxed in tone than those of Fed Governor Lawrence Lindsey, who said in a brief exchange with reporters earlier yesterday that the central bank will do "whatever is necessary" to fight inflation. The remarks came after Lindsey appeared at a forum organized by the Neighborhood Reinvestment Corp., which finances development in low-income areas.

Lindsey stressed that it is important to contain long-term interest rates, which have risen of late on fears of a pickup in inflation. Lindsey is on record urging members of the Federal Open Market Committee to move immediately to raise the federal funds rate, now 3%.

But Kelley, in a luncheon speech to the National Economists Club, disputed the argument raised by some market participants that the Fed is pursuing an accommodative monetary policy by allowing the federal funds rate to stay unchanged when government price measures have surged by more than 4% so far this year.

Over time, the funds rate "goes back and forth," said Kelley. "I don't think it's a subject for short-term concern."

Kelley said he remains hopeful that inflation will move lower, and he argued that wage pressures and other indicators do not seem to be signaling a general pickup in price increases. "Recently, it's very hard to find pressures of that sort building up in the economy. "

Kelley said he has not changed his view in the last 18 months that the economy will gradually move ahead as it struggles to overcome weakness from high debt levels, defense cutbacks, and other ongoing structural problems.

"We are on a path of slow growth," he said. "After a brief, shallow recession, we went through a recovery, and now it's beyond recovery and into expansion."

Kelley said he believes the economy still must overcome the "50-mile-per-hour headwinds" that have been cited by Fed Chairman Alan Greenspan. "I think that continues, " he said. "We are slowly accelerating from a slow and faltering start."

Kelley dismissed some press reports that the central bank is warring with the Clinton administration, which is anxious to keep interest rates low to help spur the economy. "I do not really accept that the White House is not as aware of inflation and its detrimental effects as we are," he said.

"In fact, I am quite certain that there are many people in responsible positions there who are every bit as aware of it as anybody in the Federal Reserve. That sensitivity does exist. The Federal Reserve does get support from the White House, this White House and previous ones."

But Kelley took an indirect swipe at Clinton administration efforts earlier this year to press for a lower dollar against the Japanese yen. The dollar fell by approximately 12% this year against the Japanese currency before U.S. authorities intervened in exchange markets and Treasury Department officials went out of their way to emphasize support for a steady dollar. "I think it's too bad when exchange rates change too rapidly," said Kelley. "That's clearly a negative because it dampens the real flow of goods and services in international trade." Exchange rates should reflect economic fundamentals and change slowly over time, he said.

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