Greenspan tells how he looks for inflation

August 11, 1994|By New York Times News Service

WASHINGTON -- The head of the nation's central bank told a congressional panel yesterday that changes in the U.S. economy had made it impossible for the Federal Reserve to follow any one computer model or economic indicator in setting short-term interest rates.

As a result, the Fed tries to gauge the economy's strength and forecast inflation by relying on a broad range of models and statistics and by paying attention to anecdotal evidence from trade groups and advisory councils of prominent business executives, said Alan Greenspan, the chairman of the Federal Reserve.

"Such detailed readings of firm behavior are important, for example, in indicating when inflation pressures are beginning to mount," he told the House Government Operations Committee's panel on commerce, consumer and monetary affairs.

Mr. Greenspan's testimony was further evidence that top Federal Reserve officials look for anecdotal clues about future inflation even though broad price indexes remain stable. Although the Fed's approach to setting interest rates has always been somewhat intuitive, it has grown more so in the last several years as traditional indicators, such as growth in bank certificates of de posit, have tended to show less and less correlation with economic growth.

Marc W. Wanshel, an economist at J. P. Morgan in New York, said that yesterday's testimony indicated again that the Federal Reserve was soon likely to raise interest rates once more regardless of whether government price indexes later this week showed higher inflation.

"He reiterated, in a way, that you can't wait for inflation to appear in the broad indexes," Mr. Wanshel said.

The government is scheduled to announce this morning how much producer prices rose in July; July's consumer price figures will be released tomorrow. The Commerce Department is also scheduled to announce today the level of retail sales in July.

Mr. Greenspan particularly criticized the quality of consumer price data, saying that he and many other economists felt that the government had overstated inflation, driving up the cost of federal programs linked to the consumer price index.

Many Wall Street analysts expect that the Federal Reserve's interest-rate policy committee will raise rates soon, possibly at its meeting next Tuesday. They point to signs that the economy is growing significantly faster than its long-term average and that shortages of materials and skilled workers may soon rise as a result, sending prices up.

Under a prior agreement with the House panel, Mr. Greenspan's testimony yesterday did not include any discussion of current interest rate policy or the current health of the American economy. Instead, he delivered a lengthy tutorial on the flaws in government statistics and the shortcomings of computer modeling.

Technological changes in particular, such as the spread of computers, had made it hard for the government to measure accurately the economy's health, Mr. Greenspan said. Past measurements of the tonnage of aluminum production or manufactured goods output were much easier, and probably more reliable, than measurements of the nation's output of computer programs, which vary greatly in quality.

At the same time, computer models of the economy have proved unreliable because they wrongly assume that past economic relationships will stay the same.

"History teaches us that the underlying structure of the economy is in a continuing state of flux," Mr. Greenspan said.

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