Inflation or Recession? Experts Split on Which Fed Should Fight

NEW YORK - Economists conflict on whether the Federal Reserve Board's top priority should be combating inflation or helping to secure the fragile economic recovery.

Some Fed officials at a conference last month sponsored by the Kansas City reserve bank called for the central bank to concentrate on the inflation fight. But these urgings were merely the thrusts of anti-inflation hawks within the Fed, said Francis Schott, an independent economic consultant.

Private economists' disagreement reflects a rift within the Fed between anti-inflation hawks and a growth-oriented group that would tolerate some inflation.

Dispute Hobbles Fed

Mr. Schott said the Fed's internal disagreement will keep it from making bold policy changes soon.

"You can argue that we are at a crossroad," Mr. Schott said: Either the Fed can now act to ensure recovery, "or this is our opportunity to get inflation down for the 1990s."

Economists who view growth as the more immediate goal argue that the recession has already quelled inflation.

"The numbers on inflation are encouraging," said Alfred Kahn, who was an inflation adviser to President Jimmy Carter. "Certainly, there has been enormous improvement, while the economy is very weak."

Oil Price Shocks

In July, the consumer price index stood at 4.4% above its year-earlier level. But that gain included temporary price shocks from the Persian Gulf crisis. In the first seven months of 1991, the inflation index climbed at an annualized rate of only 2.7%.

The consumer price index rose 6.1% last year, 4.6% in 1989, 4.4% in 1988 and 1987, and 1.1% in 1986, when oil prices plunged.

Economic data such as for employment and personal income point to a fragile recovery, particularly in the service sector, and this fragility should be the Fed's No. 1 concern, some analysts said. Nonfarm payrolls fell in July and June, and personal income dipped in July.

"With money-supply growth below the bottom of the Fed's target cone and recent employment numbers looking [questionable], it's not quite time to start talking about inflation yet," said David Wyss of DRI/McGraw Hill Inc.

"They have a job for 14 years; not everyone does," Mr. Wyss said, referring to the length of Fed governors' terms.

Recovery Fears Pooh-Poohed

Those arguing that the Fed should concentrate primarily on inflation said the recovery is not in great danger. The risk of the rebound's failing "is not great at the moment," said Scott Pardee, chairman of Yamaichi International (America) Inc. and a former senior official at the New York Fed.

In the past, the United States has been prone to cycles of boom and bust, Mr. Pardee said. "The only way to create steady growth is to get inflation under control."

The Bush administration's lax attitude about the current rate of inflation means the central bank must be more vigilant in curbing price rises on its own, Mr. Pardee said.

Aggressive monetary easing by the Fed now would not help the economy in the long run, said Norman Robertson, chief economist at the flagship banking subsidiary of Mellon Bank Corp., Pittsburgh. "We've heard about the fragility of recovery at the turning point of every business cycle. The result has ultimately been a much higher rate of inflation."

"The Fed is obviously under pressure to lower rates until the economy is growing vigorously." Mr. Robertson said. "But by then, it's too late. You've planted the seeds of the next inflation."

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