NEW YORK -- Clearly stung by widespread criticism that the Federal Reserve had been too quick to raise interest rates six weeks ago, Chairman Alan Greenspan aggressively defended that action last night, saying failure to act would have constituted "a threat to the job security and standards of living of too many Americans."
Addressing head-on the argument that the Federal Reserve had put the brakes on the economy March 25 without clear evidence of accelerating inflation, Greenspan offered what for him was an unusually direct rebuttal, saying the quarter-point rate increase had been a carefully calibrated form of insurance for an economy that has been growing steadily for more than six years.
"The Federal Reserve, of late, has been criticized as being too focused on subduing nonexistent inflation and, in the process, being willing to suppress economic growth, retard job expansion and inhibit real wage gains," Greenspan said in the text of a speech prepared for delivery at New York University.
"On the contrary, our actions to tighten money-market conditions in 1994, and again in March of this year, were directed at sustaining and fostering growth in economic activity, jobs and real wages."
Greenspan did not say whether he would push for another rate increase when the Fed meets to consider monetary policy May 20, although he warned that a further rate increase might be necessary if the economy did not slow.
But his speech last night laid out a rationale for central bankers to take unpopular actions in pursuit of low inflation, especially when, as now, there is no clear political consensus to curb growth before inflation breaks out.
"Those who wish for us, in the current environment, to await clearly visible signs of emerging inflation before acting are recommending we return to a failed regime of monetary policy that cost jobs and living standards," Greenspan said.
Greenspan's speech comes at a time when policy-makers at the Fed, as well as economists generally, are struggling to explain why inflation has remained largely dormant despite a combination of strong growth and low unemployment that traditional theory holds would lead inevitably to rising wages and prices.
The economy grew at a 5.6 percent rate in the first quarter, its fastest pace in more than nine years, and unemployment in April stood at 4.9 percent, its lowest rate in 23 years. Yet wages are rising only modestly -- the employment cost index for the first quarter rose just 0.6 percent -- and measures of overall inflation have remained subdued.
Greenspan has consistently advocated the need to fight inflation pre-emptively -- that is, before it infects the economy and becomes much more difficult to root out. But until the Fed's March meeting, Greenspan held off raising rates the previous year despite periodic surges in growth and a declining unemployment rate.
In raising its target for the federal funds rate to 5.5 percent from 5.25 percent in March, the Fed took the smallest step it could to keep the economy from overheating. Still, the decision brought complaints from many business executives and from politicians at both ends of the ideological spectrum that the Fed was exaggerating the inflation threat.
Pub Date: 5/09/97