WASHINGTON -- The U.S. economy shows signs of slowing to a more moderate growth rate in the months ahead, but Federal Reserve officials are not ruling out another dose of credit tightening to keep inflation in check, said Fed Board Governor John LaWare.
In an interview that took place in his office on Tuesday afternoon, LaWare said he is confident that the central bank's four moves this year to raise short-term rates to 4.5% from 3% will act as a damper on the economy.
LaWare said he is personally content to wait and watch to see what happens to the economy and inflationary pressures for a while. "But the watch is almost a daily kind of thing. If we see conditions changing. we're not going to hesitate to do whatever is necessary to adjust to that change. I don't see that threat at the moment," he said.
Members of the Federal Open Market Commuttee are scheduled to meet July 5 and July 6 to review monetary policy and adopt tentative forecasts for inflation and economic growth in 1995. While many analysts do not expect officials to tighten credit again at the meeting, some suspect another move by the Fed could come in August if the economy continues to grow vigorously.
Currently, "we've got a solid growth pattern in the economy," LaWare said. He estimated that U.S. gross domestic product adjusted for inflation will rise in a range of 3% to 3.25% in 1994.
That forecast is in line with predictions of many private forecasters, as well as the Clinton Administration. However, changes in interest rates can take six months or longer to affect the behavior of consumers and businesses, and Fed Chairman Alan Greenspan has told Congress he is aiming at containing inflation in 1995.
LaWare said he expects that GDP growth next year will slow tod a range of 2% to 2.5%, which would be below or close to the 2.5% pace that most analysts say the economy can sustain over the long haul without spurring higher inflation. The slowdown will probably begin unfolding "in the fourth quarter, maybe even in the third quarter of this year," he said.
"If you believe in monetary policy having an effect on the growth rate of the economy, you'd think that maybe monetary policy will begin to be felt a little it, and consumers may begin to feel a little bit less comfortable with yet higher levels of debt," he added.
"I'm not terribly concerned we're going to have a booming, runaway ecomony that is going to re-ignite inflation, but I think we have to be cautious not to let that happen and at the same time not over-react so that we kill this nice growth rate that we've got," LaWare said.
LaWare does not expect GDP growth in the current quarter to be higher than 3.5%, which would still be a healthy pace but is less than the estimates of some analysts. "We've seen housing starts, retail sales, and auto sales cool off a little bit," he said.
Still, LaWare noted that the major steel companies recently carried out a round of price increases that stuck, and auto manufcturers have been adopting "a more aggressive pricing stance" for selected models that are in short supply.
He also said there have been small increases in home prices in some parts of the country, while the ratio of business inventories to sales is at an historically low level.
The 6% unemployment rate reported last week by the Labor Department is "close to full employment," LaWare said. But many workers remain part time rather than full time, he said, and wage pressure "haven't shown up yet."
LaWare said the "wild card" in the economic outlook is the export sector, which has been held back as major U.S. trading partners have continued to struggle with weak economies that have dampened demand for goods and services. There are now signs that the economies of the United Kingdom, Canada, France, Germany, and Japan are picking up, and there are additional trade opportunities in smaller nations such as Mexico, said LaWare.
"If this export thing really grabs hold, we may find more growth than it looks like is there at the moment," he said.
LaWare, 66, was chairman and chief executive officer of the Shawmut Bank in Boston before he was appointed to the Fed in 1988 by President Bush.