'Soft Landing with Bumps'

June 05, 1995

Federal Reserve vice chairman Alan Blinder's assessment of the economy, as quoted in the headline above, may sound like wishful thinking against a background of recession talk. But a lot of factors, not least the recent decline in long-term interest rates, suggest he may be on the mark.

Some of the adverse numbers for April reflect the Internal Revenue Service's slowness in sending out refund checks plus the bigger bite it extracted from higher-income taxpayers. This undoubtedly contributed to a slowdown in consumer spending. But any confirmation that this was a trend rather than a glitch should await figures for May, when the IRS got its act together and added billions to available supplies of discretionary income.

Because of sharp drops in consumer confidence, factory payrolls and forward indicators of the economy's direction, the Federal Reserve Board is suddenly under pressure to lower short-term interest rates after raising them seven times since February 1994. This is a dramatic turnabout. Only a few weeks ago, market speculation focused strictly on whether the Fed would go up a notch above 6 percent as part of its continuing fight against inflation or whether it would leave things be.

It chose the latter course at the last meeting of its Open Market Committee and it probably would be wise to remain on hold for at least another two months rather than succumb to the recession talk now fashionable among some analysts. Echoing Mr. Blinder's comment, the president's Council of Economic Advisers has said that "while there are often bumps on the way to a soft landing, we remain confident that the economy will achieve sustainable growth with low inflation for the year ahead." That presumably would mean about 2.7 percent growth for the year, compared to the dismal 1 percent plus growth in the current quarter.

There is an element of jawboning in any White House statement about economic conditions that could mightily affect President Clinton's re-election prospects. After all, the shocking April drop of 101,000 jobs in non-farm payrolls, sharp cutbacks in factory orders and declines in consumer spending cannot be ignored. But elements of optimism are to be found in relatively lean inventory figures, low mortgage rates that could trigger a rebound in the housing sector, export advantages gleaned from the weak dollar, an eagerness in the banking community to keep lending and bullishness in plant and equipment investment.

Until these and similar factors weaken -- and they may not -- the Fed would be unwise to reverse course by lowering short-term rates.

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