OECD:Fed Should Make Clear US Inflation Rise is "Acceptable"
Wednesday, April 14, 2004 4:18:00 PM
--See Twin Deficits as Downside Risks to Positive U.S. Economic Outlook --Can't Rely Solely on Dollar Depreciation to Ease Current Account Gap --Special Status for Fannie Mae, Freddie Mac Should Be Eliminated
By Chris Middleton
WASHINGTON (MktNews) - The Federal Reserve should maintain its firm commitment to preserving price stability, but make sure it can communicate clearly that some increase in U.S. inflation is "acceptable," the Organization for Economic Cooperation and Development said Wednesday.
In its periodic assessment of U.S. economic conditions, the OECD made several recommendations for changes in Fed policy, in addition to warning against the risks of the twin budget and current account deficits and advising that dollar depreciation alone will not resolve these current account issues. The OECD also weighed in briefly on the matter of regulating the housing government sponsored enterprises, namely Fannie Mae and Freddie Mac -- an issue currently being considered by lawmakers and the Bush administration.
In addition to warning against deflationary trends, the OECD called for the Fed to adapt its communications more to the "new" low inflation environment and prepare investors for "the more likely event that the recovery progresses sufficiently strongly to gradually eliminate spare capacity."
"The authorities (Fed) will need to make it clear to investors that some increase in inflation from current levels is acceptable and should not be mistaken for a weakening of their commitment to price stability," the OECD report said.
The OECD called for the Federal Open Market Committee to release the minutes of its meetings earlier than the current policy of waiting until after the next meeting of the monetary policy making body. The FOMC might also consider releasing its economic projections more frequently "and for a broader range of variables and a longer horizon than currently," the OECD said. The adoption of explicit inflation targets was also encouraged.
The OECD predicted a generally positive growth trend for the U.S. economy in the next few years -- on average around 4% GDP annually. This positive outlook is tempered, however, by "significant downside risks," including a "persistent" U.S. current account deficit that could pressure up long term interest rates, "unusually slow" labor market improvement which could hurt consumer confidence and spending.
On the positive side, the high pace of U.S. productivity gains also bodes well for a "continued" robust expansion of the economy, the OECD said.
The cloudy U.S. fiscal picture prompted the OECD to caution against further expansion of the budget and call for greater budget discipline by the Bush administration and a reduction in the trend toward "public dissaving."
In efforts to boost revenues, the government should "broaden" the U.S. tax base as a first option before resorting to a reversal of tax cuts, the OECD recommended.
With regard to the current account deficit, the recent dollar decline has helped to "arrest the rise in the external deficit but, in the interest of global growth prospects, stabilization of the foreign debt ratio cannot rely exclusively on dollar depreciation," the OECD added.
In a somewhat unexpected recommendation on the more obscure issue of the GSEs, the OECD called for an end to "special status" for Fannie Mae and Freddie Mac and urged tighter regulation of the enterprises.
International trade concerns remain a vital component of U.S. economic policy, and the OECD said, "U.S. leadership to successfully conclude the Doha round is essential."
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