Newspaper article THE JOURNAL RECORD

Fed Sees Strong Economic Benefits from Low Inflation

Newspaper article THE JOURNAL RECORD

Fed Sees Strong Economic Benefits from Low Inflation

Article excerpt

N.Y. Times News Service

WASHINGTON _ Federal Reserve Chairman Alan Greenspan has found another argument to justify the Fed's attempts to shove inflation ever lower with repeated increases in short-term interest rates.

Buttressing his argument with a new Federal Reserve study, he is contending that the central bank can increase the productivity of the nation's people and factories by pushing inflation even lower than the 2.4 percent rate for consumer prices over the year that ended in April.

The reasoning goes that lower inflation forces businesses to become more efficient because they cannot raise prices, and that when businesses are more efficient, the nation's economic output and standard of living rise.

Greenspan's fascination with the link is important not only as a defense of past interest rate increases but also as one of many signals about future policy.

The research may help to explain why Greenspan has gradually become more willing than most Federal Reserve officials to raise interest rates this spring, after some initial reluctance.

A preliminary draft of the study contends that with a reduction of one percentage point in the inflation rate, the nation's productivity and economic growth rates both rise by two- or three-tenths of a percentage point.

But the argument does not impress administration officials or some private economists, who are skeptical of the Federal Reserve's new claims and worry that in using higher interest rates to slow the economy and therefore push down an already low inflation rate, the Fed will excessively restrict the economy and needlessly cost the country hundreds of thousands of jobs.

Greenspan first cited the research in congressional testimony at the end of last month to argue that further reductions in inflation may be needed.

"We don't have enough observations to know that it's conclusively the case," he told the Senate Banking Committee, "but I think it's becoming persuasively the case that not only is it _ which everyone agrees to _ important to bring the inflation rate down from 10 percent to 5 percent, but it's increasingly becoming evident that the lower we get under 5 percent, the more stable and growing the economy is."

Greenspan has previously indicated a desire to reduce inflation to 1 or 2 percent, as measured by the Consumer Price Index.

The productivity research is the latest of many justifications that the central bank has offered over the years for raising interest rates. In effect, the central bank is arguing that short-term economic pain may be necessary for long-term economic gain.

The new Federal Reserve study found that low inflation has gone hand in hand with high productivity _ and vice versa _ over the last 40 years in the United States. The same correlation was found to be true over similar periods in Britain, Canada, France, Germany, Italy and, to a lesser extent, Japan.

The study also used a much-debated statistical device to make the case that it was low inflation that raised productivity, rather than high productivity causing low inflation.

Finally, the study's authors _ Federal Reserve economists Glenn D. Rudebusch and David W. Wilcox _ attempted to adjust for the booms and busts in the business cycle, although they acknowledged that their success could be questioned.

Instead of using consumer prices, the new Federal Reserve study uses a different measure of inflation _ prices charged by businesses for all goods _ that produces slightly lower numbers and offers a broader comparison to business productivity. The study excluded prices and productivity on farms and in government agencies.

Laura D'Andrea Tyson, the head of President Clinton's Council of Economic Advisers, disagrees with Greenspan's argument. …

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