WASHINGTON -- Is the United States headed for a mild rebound in inflation because the Federal Reserve went too far in lowering interest rates?

Conventional wisdom in financial markets gives Federal Reserve Chairman Alan Greenspan and his colleagues high marks for gradually lowering short-term rates from nearly 10% in 1989 to the current 3%.

But some analysts argue that Fed officials have sown the seeds of a new round of inflation that will force the central bank to raise rates this year or next and put a brake on economic growth. That scenario is a recipe for a collision with the Clinton administration, which is counting on low rates to stoke the expansion and create more jobs.

John Mueller, chief economist for Lehrman Bell Mueller Cannon Inc., a business forecasting firm in Arlington, Va., argues that the combination of repeated rate cuts by the Fed and a robust recovery will push inflation to 4% next year and 41/2% in 1995.

For a bond market that sailed along on a 3% rise in consumer prices last year, an inflation rate of 4% or higher would force the Fed to raise rates to maintain its credibility with traders and investors.

"What we're looking at is the result of trying to stimulate the economy with monetary policy," Mueller said. "Each one of those easings has sent a wave of monetary stimulus through the economy, first through the financial markets, second through the real economy, and now it's showing up in prices."

Last week's reports of rebounding retail sales and housing starts in April are signs that the economy will show more growth in coming months than most people realize, he said.

Mueller's firm uses a computer model that includes a measure of money called the world dollar base that keeps track of currency and bank reserves held in the United States as well as dollars held by foreign central banks. The model shows dollars have been sloshing around world markets since 1990, setting the stage for higher commodity prices followed by a general rise in prices.

"In fighting the recession with monetary policy, the Federal Reserve and other central banks gave a real jolt to the world dollar base in 1990 and early 1991," Mueller said. So far, the impact on inflation has been muted by high unemployment and productivity gains by business, but by next year the combination of easy money and an improving economy will be showing up more clearly in the price measures, he warns.

Brian Wesbury, chief economist for the Chicago brokerage firm of Griffin, Kubik, Stephens & Thompson inc., agrees that Fed officials have gone too far. "They've dropped short-term interest rates a lot further than inflation has fallen," he said. "I'm really worried that the Fed's been way too easy, and my concern is short-term rates are going to pop up."

Wesbury says that by setting a federal funds rate of 3%, the Fed is allowing banks to lend to each other on the cheap and adding to inflationary pressures. He predicts prices could rise 4% in 1993 and 5% next year, forcing the Fed to raise rates beginning later this year.

"The longer the Fed waits to tighten, the more upward pressure on nominal growth in the economy and the more pressure on inflation," bury said in a market letter to clients.

Fed officials have dismissed the decline in the money supply this year as a technical shift by investors from bank certificates of deposit to higher-yielding stock and bond funds. But Wesbury argues that much of the money to buy mutual funds has filtered back into checking accounts of businesses and individuals and pushed up growth in MI, a narrow measure of money that includes currency in circulation and checkable deposits.

Fed figures show that M1 jumped 8.9% in 1991 and 14.2% in 1992. The monetary base, another money measure that includes currency in circulation plus bank reserves, rose 6.3% in 1991 and 8.2% last year.

Banks are not required to set aside reserves for certificates of deposit, but they must do so for M1 deposits. Wesbury says that as bank demand for funds has increased, the Fed has had to be especially generous in providing reserves to the banking system to keep short-term rates low.

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