In its midyear report to Congress on monetary policy, the Federal Reserve projected an economy that would grow moderately in real terms during the second half of this year and through 1993. Inflation was expected to remain generally repressed.

I would say this is the minimum tolerable growth in real gross domestic product, in view of our unhappy social and economic circumstances. A somewhat faster recovery would certainly be preferable.

Moreover, if policy deliberately aims at a modest recovery, it runs the risk that the entrepreneurial verve so essential to a truly dynamic economy will be stifled, and that growth will turn out to be even less than expected.

Indeed, a weakening in entrepreneurs' "animal spirits" may well help explain the forecasting errors of the Fed and some other analysts in the past year.

Inflation Fight Drags On

Satisfactorily rapid growth for the United States - and the rest of the industrialized world - is hard to attain at the moment because we are still in transition between efforts to reduce inflation and efforts to encourage growth.

Despite country-by-country variations, economic policy in the industrialized world is still tilted more toward suppressing inflation and keeping it suppressed than toward promoting growth.

This worldwide policy emphasis has been an important factor holding back the pace of the U.S. recovery.

Our economy now depends more than it used to on the rest of the world. This dependence comes less from increased global interconnection in financial and products markets - though this contributes - than from our inability to use fiscal policy countercyclically.

Thus we are left without what has often been a crucial tool for propelling a reluctant domestic economy.

Without a domestic push, and with monetary policy having somewhat underestimated the problem, we depend more on expanding markets abroad to pull our economy along.

Weakness Abroad

But foreign industrialized economies have been too weak to do this, just as the United States has not been strong enough to help them.

The weakness abroad has been reflected in declining stock prices. Stock markets abroad are noticeably down from their peaks for the year.

The Japanese market has been in an extended slump, falling of its own weight and responding to a governmental policy intended to remove the excesses of the so-called bubble economy.

The sharp drop has brought the Japanese market much more in line with other major markets and has raised the real cost of capital to Japanese business to much more realistic levels.

In the process, a very moderate inflation rate has been reduced even further. But at the same time, given the capital investment already in place and a slumping world economy, Japan has found little incentive or need to add to its capital stock.

The economy, for that and other reasons, has weakened.

European stock markets are much less depressed, either psychologically or in terms of price and activity, than the Japanese market.

That is because the Japanese market is going through both a cyclical adjustment to a slump in business profits and a structural readjustments to the real world cost of capital.

The very recent weakness in European markets occurred basically because they can see how troublesome it is to reduce inflation and obtain economic convergence in the core countries.

Wanted: More Demand

The U.S. stock market has positioned itself more optimistically than any other major market. It is clearly priced in anticipation of a continuing rebound in profits in little if any rise in longer-term interest rates.

U.S. business has set the stage for good profit performance as a result of its cost-cutting in recent years. However, for this potential to be fully realized, the demand for goods must show some vigor.

That is one reason that the Fed's economic growth projections should be considered the minimum tolerable; more would be better.

But I doubt that U.S. monetary policy alone can assure sufficient expansion in product markets.

It will take more cooperative efforts worldwide, a reorientation of policies, and a broader spectrum of policy instruments.

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