Alan vs. Alan at the Fed

September 19, 1994

Hard on the heels of academic warnings that inflationary pressures in the economy are sharper than generally perceived, financial markets are shaky in anticipation of still more boosts in interest rates before the end of the year. These developments come at an awkward time for the Federal Reserve Board, where philosophical differences between chairman Alan Greenspan and vice chairman Alan Blinder are beginning to surface.

Mr. Greenspan, the ultimate inflation hawk, has even urged a change in the law to make inflation control the sole mission of the nation's central bank. But Mr. Blinder, the first Clinton appointee to the Fed and a self-proclaimed dove on inflation, has let it be known he is satisfied with the board's present dual mission to pursue "maximum employment" as well as "stable prices."

Mr. Blinder and Mr. Greenspan agree that, in the long term, monetary policy will affect only the inflation rate. But Mr. Blinder has emphasized that, in the short term, interest rates set by the Fed quickly affect unemployment -- the implication being that in a pinch he would favor easier monetary policy. Mr. Greenspan probably would not reject Mr. Blinder's theories, which reflect current economic thinking, but he is content to let Mr. Blinder explain himself in his new public fishbowl. The two Alans may be rivals for the chairmanship in 1996, when a super-sensitive election-year appointment awaits President Clinton.

Despite problems a-plenty, we are encouraged by three factors in the present situation:

* Mr. Blinder is not so unhappy with the current 6.1 percent unemployment rate that he would withdraw his endorsement of the Fed's five boosts in short-term rates since February. Nor can it be assumed that he would oppose a sixth increase if price trends continue upward.

* For all the nuanced differences between the No. 1 and No. 2 men on the Fed, both favor a tighter monetary policy than that advocated by organized labor and liberal Democrats, including Maryland Sen. Paul S. Sarbanes.

* Despite Wall Street gyrations, the U.S. economy is in better shape than it has been in a long, long time. Unemployment at 6.1 percent, even after the Fed interest rate boosts, is close to what Mr. Blinder would consider a "natural" rate of 5.9 percent. Inflation is still in check, no doubt due in part to timely Fed actions. Growth patterns are holding steady for the long haul. And U.S. productivity and competitiveness again lead the world.

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