WASHINGTON - Federal Reserve Board Chairman Alan Greenspan is likely to nudge up the Fed's forecast for inflation today while conceding that the economy's performance remains below par, analysts say.
Greenspan is scheduled to deliver the Fed's semiannual report on monetary policy this morning to a House Banking subcommittee chaired by Rep. Paul Kanjorski, D-Pa.
While inflation pressures have eased with recent consumer and producer price reports, analysts say there is little chance Greenspan will reaffirm what is now viewed to be an overly optimistic forecast issued early in the year that inflation will rise only 2 1/2% to 2 3/4% this year.
"That is obviously an untenable estimate, given the inflation figures to date," Elliot Platt, director of economic research at Donaldson, Lufkin & Jenrette Securities Corp., said in a market letter.
Most forecasts are for prices to rise between 3% and 3 1/2%. That may not seem far off the mark, but Fed officials have already gone on record in May showing their concern by voting to adopt a policy directive tilted in favor of higher short-term rates. Many Fed watchers believe officials remain committed to raising rates if more bad inflation figures pop up on bond dealer screens.
Meanwhile, the economy has continued to struggle. Greenspan is expected to acknowledge this by issuing a revised economic growth forecast for 1993, perhaps around 2 1/2%. In February, Fed officials were calling for growth in the range of 3% to
That early-year forecast was close to the 3.1 % increase projected by a Clinton administration anxious to win credibility in the bond market with realistic budget assumptions. But now, administration officials agree with private forecasters that the economy is still bedeviled by defense cutbacks and cautious businesses reluctant to hire.
Moreover, consumer and business surveys consistently reveal worries over tax increases and health-care costs being discussed by the administration and members of Congress.
Last week, concerns about the economy were revived when the Fed reported that industrial production fell 0.2% in June and as federal relief officials continued to add up the damage from Midwest flooding.
Economists say the floods ravaging the Missippippi basin will not do much overall harm to the massive U.S. economy, which generates over $6 trillion a year in goods and services. And the impact on food prices is also expected to be small.
"It's a story of personal hardship," said Laurence Meyer, president of a forecasting firm in St. Louis. "There's an impact, but it's not the kind of thing that should drive the price of a 30-year bond."
Nonetheless, Greenspan must maintain the central bank's credibility with the bond market without alienating members of Congress whose attention is elsewhere.
"Congress is focused on deficit reduction and the toll it places on the economy," Jim Glassman, an economist at Chemical Securities Inc., said in a market letter. "Legislators certainly are more focused on today's economic risks than inflation risks, especially now that recent favorable price reports have put to rest inflation scares."
The Clinton administration openly concedes that deficit reduction is a drag on economic growth that depends on continued low interest rates to fuel consumer purchases and business investment. Treasury Secretary Lloyd Bentsen, who has emerged as the president's chief economic spokesman, continually warns that low rates are vital to keep the economy from falling back into recession.
Meyer suggested that Greenspan will skillfully build on the Fed's tilt toward a tighter monetary policy to reassure the bond market, while telling Congress that "we don't think a pre-emptive strike against inflation is going to be necessary because inflation seems so well controlled. "
In fact, some analysts believe Greenspan has an escape hatch from congressional pressures because the likelihood of a Fed move to tighten rates has receded. With falling prices of oil and other commodities and a long bond yield approaching 6.50%, some of the indicators that Fed officials themselves emphasize in setting policy are once again market-friendly.
"I think he can defend himself by pointing out that the Fed hasn't done anything and short-term rates are extremely low," said Bruce Steinberg, manager of macroeconomic analysis for Merrill Lynch & Co.
Steinberg decrease this year in the federal funds rate from the current 3%. The Fed's May policy directive toward higher rates "was public relations for the bond market" on inflation numbers that were "aberrational," he said.
There is little interest among Fed watchers over the preliminary targets Greenspan is expected to issue for money supply in 1994. Last year, the Fed drew a lot of interest when it trimmed the growth range for M2 to between 2% and 6%. M2 includes currency, savings accounts, money market funds, and small certificates of deposit.
Analysts say the continued flight by yield-hungry investors from bank deposits to stock and bond funds is keeping money supply growth below target this year.