An Opportunity We Can’t Afford to Miss : Inflation: The Fed should resist pressures to juice the economy and instead seize the chance to restore price stability.

America’s 7-year-old economic expansion has turned a little squishy of late, notably in manufacturing. Employment and the gross national product continue to grow, though at a slower pace. This is not unpleasant news. The economic slowdown creates an opportunity to bring to a gradual end the chronic year-in-year-out inflation that picks the pockets of Americans. Not since the early 1960s has the country had anything like price stability.

Stable prices are good for prosperity. The contrary idea has taken root because bursts of excessive economic expansion are associated with rising prices. But inflation does not produce prosperity. Indeed, it is a threat to sustained prosperity.

During the last three years, the inflation rate has been a relatively stable 4% to 5%. But inflation is more likely to accelerate than slow down. That would upset family budgets, destroy jobs, make some profitable ventures unprofitable, raise home-loan payments under adjustable mortgages and drive up interest rates across-the-board. Additional distortions and even recession would follow. These risks of price instability keep interest rates high and restrain economic growth.

Sustained price stability doesn’t mean no change in price levels. It means that the changes are usually small, whether up or down, and average out to roughly zero. Reducing inflation would bring down interest rates, especially for home buyers and for companies considering expansion. Interest on the national debt would decline as well. Stable prices mean that a dollar saved buys as much next year as today.

With the export boom cooling and with manufacturing somewhat soft, the Federal Reserve Board faces the acid test of its resolve to end chronic inflation. Ironically, the economic softness that may cause the Fed to lose its way creates the conditions favorable for ratcheting inflation down--and keeping it down.

So the Fed must resist White House pressures to do too much about the emerging economic slowdown. With a calm hand on the monetary throttle, price stability can be restored, gradually, with little economic disruption. This is the “soft landing” the Fed has been aiming for.

Since early summer, the Fed has been bringing interest rates down. The overnight interbank loan rate, which the Fed controls and which is the thermometer of monetary policy, has declined from 9.75% in June to 8.5%. Having prevented a speed-up of inflation, the Fed has relaxed monetary policy cautiously. So far, so good.

But the White House wants still more relaxation, and more after that. Not a week goes by that Michael J. Boskin, chairman of the Council of Economic Advisers, or Richard G. Darman, the budget director, does not signal the Federal Reserve to pump more newly created, high-powered dollars into the banking system. This is typical of White House short-term economics, whoever is President.

But it’s time for the Fed to ignore the signals and let the forces of adjustment and change in this huge, continental economy of ours work themselves out. A slowdown, even a mild letdown, after seven years of growth would help to lay the groundwork for non-inflationary expansion in the ‘90s. Lower interest rates and a greater sense of stability would be especially good for such states as California and Massachusetts that need new enterprises and jobs to take up the economic slack expected from cuts in the Pentagon budget.

And the timing couldn’t be better. The Labor Department estimates that the labor force is growing, on average, by only 1.2% a year. Allowing for improvements in productivity, an economy growing at a rate of roughly 2% to 2.5% would be enough to maintain the present low rate of unemployment. That may not create the euphoria that produces elections landslides, but it would be the right thing to do.

Rep. Stephen Neal (D-N.C.), chairman of the House subcommittee on domestic monetary policy, has introduced a joint resolution of Congress that would instruct the Fed to achieve price stability in five years. Federal Reserve Chairman Alan Greenspan has endorsed it. The Fed’s policy committee in August quietly adopted “progress towards price stability” as the first of its several goals. Let the Fed have the courage of its convictions.