WASHINGTON -- Federal Reserve officials disagree whether more credit-tightening is needed to cool the economy and contain inflation, Fed governor John LaWare said yesterday.
"There's a variety of opinions around the table. There are those who have thought for some time that more is needed, and others who are less sure," LaWare said during an interview in his office.
LaWare's comments suggest that Fed chairman Alan Greenspan will have to do some persuading if he seeks to build a broad consensus within the Federal Open Market Committee in favor of another dose of higher short-term rates. The committee's next meeting is Nov. 15, and most analysts now believe Fed officials will not consider adjusting rates before then.
According to the minutes of the Aug. 16 FOMC meeting, when policymakers boosted short-term rates to 4.75% from 4.25%, members said they hoped the move "might reduce the need for further tightening later, or possibly even avert that need entirely."
That decision came on a vote of 12-to-0, with the support of vice chairman Alan Blinder and Fed governor Janet Yellen -- both appointees of President Clinton.
Since then, however, the bond market has continued to be buffeted by strong economic indicators. pressuring Fed officials to keep raising rates until there is convincing evidence that the economy's pace is moderating.
"I think the economy is in pretty damn good shape. Things seem to be boiling along pretty well," said the 66-year-old LaWare, who was appointed in 1988 by President Reagan.
LaWare said Fed officials accept the widely held view among economists that gross domestic product cannot continue to exceed 2.5% without adding to inflation pressures -- a situation that he believes exists now. "Eventually it begins to catch up with you and you have shortages and price increases, and wage demands and inflation pressures build up,"he said.
The operating rate for U.S. mines, factories, and utilities "is flirting with the level at which you begin to worry a bit, and there are some industries like steel operating at or close to capacity," said LaWare. The Fed is due to report the September pace of industrial production and the capacity utilization rate on Friday.
LaWare noted that Ford Motor Co. and Chrysler Corp. recently signed steel contracts calling for price increases of 5% to 6%. "Eventually that kind of thing flows through to final sales prices unless the rate of productivity improvement is sufficient to offset it. It doesn't look like that is completely the case right now," he said.
LaWare now expects the economy's pace to be "somewhat stronger than most people are projecting" in the second half of the year and predicted that GDP growth for the year is "likely to be closer to 3.5% than 3%."
However, he said that by 1995 the full impact of the Fed's series of rate increases this year will start to show up "far more dramatically," contributing to milder growth of approximately 2.75%.
"We may see the inflation rate creep up a bit to 3.1% or 3.2% in 1995, but that's not a description of a disastrous condition, in my opinion," LaWare said.
LaWare dismissed worries by some Wall Street economists that inflation will climb to 4% next year. "We don't see it," he said. "I don't think there's anything in the numbers that we're looking at right now that foreshadows or predicts 4% inflation."
LaWare said he expects U.S. exports to be "very strong" and provide an important source of strength in the economy as U.S. companies reap the benefits of a cheap dollar, competitive quality and technology, and improving prospects for growth abroad.
The outlook for consumer spending, which accounts for two- thirds of GDP, is more uncertain, according to LaWare. "The savings rate is low and consumer debt has grown very substantially. You wonder at what point the burden of debt service imposes more restraint on consumer spending," he said.
In other comments, LaWare expressed surprise at the recent fuss over a yield of 8% on the Treasury long bond and does not consider a spread of 325 basis points compared with the federal funds rate of 4.75% as "obscene." He also said he was pleased that President Clinton has refrained from criticizing the Fed for raising rates.
