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To: John Mansfield who wrote (12257)	5/27/1998 3:09:00 PM
From: Alex	Respond to of 116837

ANALYSIS--Fed won't up rates until inflation perks By Isabelle Clary NEW YORK, May 27 (Reuters) - Having kept monetary policy steady for 14 months, the Federal Reserve has indicated it will hold off raising U.S. interest rates until inflation perks up and makes a credit tightening acceptable to the American public, Fed watchers said. ''The Fed's current policy of forbearance will not last forever, but as long as we have good factors holding down inflation, there are good reasons for the Fed to hold its current position,'' said former Fed Vice Chairman Alan Blinder of an even-keeled Fed policy marked by a single, 25-basis-point rate hike in more than three years. The notion that inflation luck will eventually run out was very much debated at the Federal Open Market Committee (FOMC) March 31 meeting. ''Members commented on the persistence of unusually favorable economic conditions, characterized by strong growth and low inflation,'' the minutes of that meeting, the last on public record, said. ''But a number questioned how long these conditions might last without a policy adjustment.'' KEYNESIAN THEORIES VERSUS THE REAL WORLD: One reason the FOMC fears the inflation luck may run out is rapid growth ''adding to pressures on labor.'' ''I don't believe the Fed ever deliberately set out to push the unemployment rate below 5.5 percent and certainly not to 4.3 percent. It is something that just happened,'' said now a professor of economics at Princeton University. ''The question becomes 'Do you try to undo this (low jobless rate) right away or do you let it roll?''' asked Blinder, who also is the vice chairman of the G7 Group think-tank. The Fed signaled its caution against wage inflation when it introduced a tightening bias in July 1996 as the U.S. jobless rate fell to 5.50 percent, below the 5.75-percent threshold a school of Keynesian economists -- some of whom are policymakers -- believe to be inflationary. The Fed acted just once on that bias, tightening in March 1997 as rapid growth creating more jobs than any other post-World War II expansion surprisingly went hand in hand with falling inflation. SPECIAL FACTORS AND ASIA: Fed Vice Chair Alice Rivlin stated earlier this month the Fed would have hiked rates late in 1997 had it not been for the Asia crisis, a view echoed by other Fed officials. ''It's the recognition of a unique development, the Asian crisis. You would not be tightening into that,'' said Stephen Axilrod, a former Fed Board staff director for international affairs. Axilrod, now an independent consultant, said the Asian crisis, while transitory in nature, should unfold for months to come and curb prices. If other Asian economies were to be engulfed in the turmoil, this could have a much longer impact on the U.S. economy, the former Fed official added. Axilrod, a key figure in the Plaza Accord that helped rein in a lofty dollar, said the Fed's inaction amounted to the ''acknowledgment of disinflationary forces in the global economy, including in the United States where ... it is very unusual to see (declining inflation) that late in an expansion.'' ''I think people at the Fed have been quite surprised at the disinflationary trend in prices. They recognized it, and in effect, got a bit of tightening in that disinflationary environment,'' Axilrod added. ''The real interest rates are reasonably high by historical circumstances.'' REAL FUNDS RATE Fed Chairman Alan Greenspan made the same point about real or inflation-adjusted rates to explain the absence of policy changes in the past year. The funds rate stands at 5.50 percent or 50 basis points below the peak of the prior tightening cycle ended in 1995. In real terms, the funds rate is as restrictive at it was at the end of the 1994 tightening cycle or at about 340 basis points over the core Consumer Price Index. ''Fundamentally, it (absence of Fed tightening) reflects the instinct of Greenspan, because he believes there is no inflation with a lot of productivity improvement and a strong dollar,'' Axilrod concluded. FED FUNDS RATE MOVES IN THE 1990S: -- The Fed kicked off a protracted easing cycle in February 1989, ultimately lowering the funds rate from 9.75 percent to 3.0 percent in July 1992 as the U.S. economy struggled with banking problems, corporate restructuring and the bursting of a real estate bubble. -- The Fed began a rapid-fire preemptive tightening cycle, doubling the funds rate level to 6.0 percent in just a year, from February 1994 to February 1995. -- The Fed eased slowly between July 1995 and January 1996, bringing the funds rate to 5.25 percent as U.S. growth gave signs of weakness after the quick tightening episode. -- The Fed took what it called a ''prudent'' anti-inflation step, pushing the funds rate back to 5.50 percent in March 1997.