At its meeting this week, the Federal Open Market Committee will review its monetary targets and economic outlook for this year and will assess the prospects for 1994. Committee members should find conditions more problematic than they had thought.

At the beginning of this year, the committee took the view that the nation's output would probably grow by a little more than 3% and consumer price inflation by less than that.

On those assumptions, output growth would accelerate and inflation would decelerate from the year before.

Growth May Remain Sluggish

The outcome for a year is always uncertain this far in advance (only first-quarter figures for gross domestic product have been published to date), but at the moment it looks as if inflation will be more rapid and growth slower than the Fed originally anticipated.

While the differences are not likely to be large, it is quite possible that inflation could accelerate and output growth could decelerate, instead of vice versa.

The Fed is in the position of having to recognize that the balance of inflationary and deflationary forces may have tilted in an unexpected and uncomfortable way. Policymakers will have to determine where the greatest risk to the nation's well-being lies.

Little Evidence of Danger

With regard to inflation, from what I can see at present there is little or no market evidence that it is in danger of getting out of hand. Longer-term interest rates have been declining.

Measures of commodity price pressures have, on balance, been quiescent recently. The overall consumer and producer price indexes for May were reassuring, after four months when they gave unexpectedly strong inflationary signals.

In brief, though inflation is likely to creep up a bit this year, the economy is not threatened by cumulative upward price pressures that would result from widespread inflationary expectations embedded in the business cost structure.

Deflationary Forces

Clearly, the Fed's primary job over the longer run is to forestall such cumulative pressures. But at present the Fed also has to take account of the deflationary forces that are at large in the industrial world.

There are two primary sources of deflationary pressures. One is the budgetary package being negotiated in Washington. The second involves the extended slumps in Europe and Japan, which are partly the result of a prolonged battle against price and asset inflation.

For long-term economic health, the United States clearly needs a substantially deflationary budget package. The administration's original proposal was a step in that direction, but it begins to look as if we may get a fiscal program that has a somewhat greater deflationary impact than expected because fewer of the proposed expansionary off-sets may be adopted.

Curbs on Spending

The small near-term stimulus package was earlier defeated. And the proposed new intermediate-term spending initiatives and tax incentives are very likely to be cut back severely.

I don't want to overdo the potentially restrictive effect of the current budgetary process. After all, recent history suggests that all budgetary restraint program adopted by the Congress promise more than they in fact deliver.

Nonetheless, there is a risk to the United States and world economies that two potentially deflationary forces -- a prolonged slump abroad and a larger-than-anticipated budgetary restraint package here -- may coincide in time.

A Double Threat

The best scenario had always been that a deflationary budget package in the United States would be offset by a return to growth abroad. If that growth is delayed significantly further, we would have the unwelcome prospect that the deflationary impact of the U.S. budget program would be intensified, not offset, by external influences.

Such a double threat to growth may not actually occur, but the more the European and Japanese recoveries are delayed, the greater the risk. In that context, President Clinton has a strong case at the Tokyo summit for seeking a greater commitment to economic growth from the other industrial countries than they have thus far shown.

Federal Reserve policy probably should remain on hold for now in all these circumstances. The budgets package is going to conference in the Congress, and it will be several weeks before we know the timing, not to mention the full dimensions, of tax increases and spending cuts that will emerge.

And it will also be a while before we can get a better fix on how committed the other industrial countries are to growth.

Patience has proved to be the Fed's strong suit over the past couple of years, and a little more is probably required.

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