Strong Fundamentals Are Expected To Continue, Two Reports Signal
By YOCHI J. DREAZEN Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Reports by the Federal Reserve Bank of Philadelphia and the National Association for Business Economics suggest a continuation of the same strong fundamentals that have kept the economy booming for the past nine years.
Nevertheless, a growing number of analysts have begun questioning the Federal Reserve's stewardship of the economy, with some even wondering whether the central bank has fallen behind the curve on inflation and the surging stock market, potentially leading the nation down a risky economic road.
The Philadelphia Fed and NABE surveys call for gross domestic product growth of 3.8% this year before slowing to 2.9% and 3%, respectively, in 2001 as the impact of Fed interest-rate increases cascades through the economy. GDP grew by 4% last year.
Both groups expect inflation to remain under wraps as the unemployment rate, already near a record low, falls even further this year before inching up again in 2001 as the economy slows.
Inflation, as measured by the consumer price index, is projected at 2.5% in 2000 and 2.6% in 2001, both surveys found. Unemployment, meanwhile, should fall to 4.1% for the year 2000, according to NABE, or 4% by the Philadelphia Fed's measurement. Both surveys expect a jobless rate of 4.3% in 2001.
Still, the surveys highlight difficult questions confronting Fed policy makers, who are wary of allowing the economy to overheat for fear that it will trigger widespread inflation. The central bank has already raised rates four times since last July, but the economy so far shows few signs of slowing, and most analysts expect two further increases in March and May.
At the same time, inflation, by nearly all measures, remains under wraps, and any aggressive Fed moves run the risk of slowing the economy too soon, needlessly curtailing future growth while sending the jobless rate spiraling higher.
"You don't want the Fed to throw the expansion baby out with the bathwater by tightening before they need to," said Diane Swonk, chief economist at Bank One Corp. in Chicago and the president of NABE. "The risks are rising now, but a wrong choice could really do some damage."
The NABE survey found that increasing numbers of economists have begun expressing skepticism about the Fed's stewardship. Only 62% of those polled believe that current monetary policy is "just right," the lowest percentage since May 1996, the survey found. The figure stood at 74% last August. About 32% say the Fed is stimulating the economy to levels of growth that cannot be sustained without triggering inflation, the highest percentage since 1995.
Nearly half of respondents, meanwhile, believe the Fed would act "asymmetrically" toward the stock market, easing monetary policy in case of a market collapse, though not necessarily tightening to keep the market from rising too high.
Some economists believe such a policy, which the Fed has consistently denied, would contribute to a speculative market bubble by leading investors to assume the central bank would minimize their risks in case of a collapse. NABE respondents identified a market bubble as the most serious problem facing the U.S. today.