WASHINGTON - The U.S. economy may be poised to break out of the sluggish pattern of growth that has persisted during most of the recovery, according to Federal Reserve Board Governor Susan Phillips.

In an hour-long exclusive interview in her office on Tuesday, Phillips also said the Fed is seeing calls by bankers and others to let additional inflation grease the wheels of the economy. But she insisted that the best course is for the central bank to continue promoting price stability, which Fed Chairman Alan Greenspan said recently has largely been achieved.

"I don't see the risk of slipping back as being that great," said Phillips, who estimates that third-quarter gross domestic product grew at about 1.5%. The Commerce Department is scheduled to release an advance estimate of gross domestic product on Oct. 27.

"I think that it's possible that we may stay at that 1.5% range for a while, but I also see some signs that we could be getting better positioned for breaking out." said Phillips.

She attributed the drop in the unemployment rate to 7.5% from 7.8% over the summer to the federal summer youth program and a decrease in the civilian work force.

"Overall, it's not clear there's been that much change in the employment picture," she said. "We're still seeing a number of layoffs. "

But while there are signs of "a hesitance" in the economy, "It has not been a major deterioration," she said. "There are what I would call some healthier signs."

Phillips said recent money supply figures, for example, are "showing signs of some improvement."

Fed officials calculate that the broad M2 measure of the money supply expanded at an annual rate of 3.6% in September and 3.0% in August, although the overall rate for the year is still below the central bank's target range of 2.5% to 6.5%. Much of the recent growth has been in the narrow M1 measure of money, which accounts for little more than a quarter of M2 and which shot up 19.8% in September and 16% in August,

Phillips said she was also encouraged because commercial and industrial loans by banks showed some spark in September after falling earlier in the year. "Anecdotally, we are getting reports that banks are being a little more aggressive in marketing loans," she added.

"Financial markets are generally strong enough to help support a budding recovery," Phillips said. "Credit markets and banks are getting better positioned to help finance expansion. Capital positions are strengthening [as banks have] seen reasonably good profitability this year. And so the financial capability or expansion seems to be getting into place."

The economy should also get a boost as households and corporations continue to benefit from the wave of debt refinancings in response to the drop in interest rates, said Phillips.

At the same time. Phillips acknowledged that the Fed is already aware of appeals to reflate the economy. "You're starting to see articles now urging that we need to get back to inflation, we need higher prices, particularly in the banking publications," she said. "Bankers want higher inflation because they get the asset prices up, real estate prices up.

"So you start to see arguments about [how] a little inflation greases the economy, that kind of thing. I don't agree with them. I think the best situation we can have is stable prices. I think it's better for long-range planning. I think it takes out the uncertainty for investment decisions."

A return to inflation would only benefit debtors because it would enable them to pay back credit in cheaper dollars, said Phillips. And, she added, a return to higher inflation would be "particularly devastating" for people on fixed-income and low-income people who have to spend most of their money on food and housing.

Phillips agreed with recent comments by Greenspan that some of the common measures of inflation are technically flawed and overstate price levels. The consumer price index issued by the Labor Department, which shows inflation around 3%, could be closer to 1%, she suggested.

Phillips declined to comment on bond market worries that Democratic presidential challenger Bill Clinton will push for a major stimulus plan to boost the economy if he is elected. But she said she would prefer to see measures such as a capital gains tax cut or an investment tax credit that boost savings and keep the deficit from swelling.

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