Despite calls for action, Fed unmoved
By Peter G. Gosselin, Globe Staff, 09/03/98
<Picture>EW YORK - With investors shaken by the recent stock plunge and much of the world slipping into an ever-deeper financial morass, Americans are turning to the institution that has bailed them out of economic trouble so often in the past - the Federal Reserve.
In growing numbers in recent days, political leaders, economists and even ordinary shareholders have called on the Fed to cut short-term interest rates to ward off what some see as a lurking danger of recession and steady the world economy.
But, according to a wide variety of analysts, neither Fed officials nor policy makers elsewhere are likely to act anytime soon. Indeed, say these analysts, for the first time in the post-Cold War era, the nation and the world appear headed for a period of substantial upheaval with no one ready or able to guide the course of economic events.
''We're in the midst of a global crisis that's more severe than anyone expected, and there's no big brother out there to fix it,'' said David M. Jones, a veteran Fed watcher and chief economist with Aubrey G. Lanston & Co. in New York.
''The free marketeers are getting their wish with a vengence,'' said Gary C. Hufbauer, director of studies for the Council on Foreign Relations in New York. ''There's not a lot of political will in any of the advanced nations to manage this crisis so the markets are going to carry us where they will,'' he said.
Analysts said that the Fed is reluctant to act because, despite the recent spate of bad stock market news, many Fed officials still fear the US economy is growing unsustainably fast and must be slowed to avoid rekindling inflation. Cutting interest rates would have the opposite effect of speeding the economy up by reducing the borrowing costs of companies, home buyers and others.
Rate-cut advocates argue that the central bank is unduly nervous about inflation and doesn't appreciate the havoc that the recent stock sell-off may cause by making middle-class Americans feel poorer and therefore less ready to spend, a combination that they worry will push the United States into recession and other countries into chaos.
''We can't keep up the miracle combination of negligible inflation and robust growth going without easing'' interest rates, said Roger M. Kubarych, a former senior Fed official who is now a partner with the New York financial firm of Kaufman & Kubarych. In addition, he said, the United States can't fill the role the rest of the world needs it to fill - as ''importer of last resort'' - without lower rates.
''The Fed is acting a lot like petrified wood. They need to cut rates to restore confidence,'' said Senator Byron L. Dorgan, a North Dakota Democrat and longtime Fed critic.
In itself, Fed officials' reluctance to act might not be so worrisome, according to analysts, if it were not for the fact that no other policy maker here or abroad appears up to the job of managing the latest economic crises in Asia and elsewhere, and ensuring they don't turn into a global rout.
Indeed, from President Clinton to Russian President Boris Yeltsin; from Japanese Prime Minister Keizo Obuchi to German Chancellor Helmut Kohl, the world seems woefully short of strong leadership and less prepared to cope with economic trouble than it has in years, said these analysts.
''You look at the G7 countries and there's not a lot of strength,'' said Hufbauer, referring to the so-called Group of Seven nations, including the United States, Japan, Germany, and the United Kingdom, that have the world's largest economies and at least until recently provided the world's economic leadership.
The International Monetary Fund, which has spent the last year and close to $100 billion trying to prop up the Asian economies and Russia, is ''close to being discredited for its mishandling'' of those crises, Hufbauer said. ''The World Bank is not particularly strong.''
Only the Fed and its counterpart central banks in the other industrial nations retain substantial clout, Hufbauer said, and ''they don't want to use it.
''They believe we were in a financial bubble and that this correction is exactly the tonic that's needed,'' he said.
To be sure, analysts said, managing global economic crises has never been easy, and the task has only grown harder as nations' economies have become more entwined since the end of the Cold War. But in virtually every other crisis in recent years, one or another of the major economic powers has stepped in to try to guide events.
When Thailand, South Korea and other Asian nations first hit the skids last year, for example, the IMF under close US direction stepped in with money and policy prescriptions. When Mexico became economically unhinged in 1994 and 1995, US Treasury Secretary Robert Rubin almost single-handedly pumped billions of dollars of loans into its economy. When Latin America was unable to repay its debts in the early 1980s, the Fed boosted US growth to help pull the region out of trouble.
If Fed officials and other policy makers now take a hands-off policy toward Asia, Russia, Latin America and other current economic trouble spots, said Jones, the veteran Fed watcher, ''this will be the first time we've tested the system without any intervention.''
This story ran on page D01 of the Boston Globe on 09/03/98.
c Copyright 1998 Globe Newspaper Company.
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