Fed Expects No Recession, May Not Ease Credit

Top officials of the Federal Reserve Board said Saturday they do not believe the nation’s economy is headed for a recession despite the surge in oil prices that has resulted from the Middle East crisis.

The Fed officials also indicated that the nation’s central bank has no current plans to alter its economic policies in the wake of Iraq’s invasion of Kuwait, and thus is not now moving to lower interest rates to help the economy expand.

The surprisingly optimistic views of the Federal Reserve officials on the direction of the economy are critical, since they are the central bankers who will largely determine whether to set policies that will either encourage faster growth or, alternatively, tighten up the economy in order to curb inflation.

While the Bush Administration has been pushing the Fed to ease up on its policies to avoid an economic slowdown just when the nation is headed into an international crisis, the central bank seems to be maintaining its focus on curbing inflation.

So far, in fact, officials say there is a general consensus at the Federal Reserve that the bank should stick to the credit policies adopted prior to the Middle East crisis. The goal is to hold down prices while also allowing the economy to continue to grow at a slow pace over the next year.

While Fed officials, meeting at a conference here sponsored by the Federal Reserve Bank of Kansas City, declined to comment on policy matters, their views on the economy suggest that they did not alter their course last Tuesday in Washington, when the bank held its first major policy-making meeting since the Iraqi invasion.

“I’m more optimistic than most people that a recession isn’t baked into the cake right now,” said Edward Kelley Jr., a member of the Board of Governors of the Federal Reserve, said in an interview. “I’m optimistic that consumer confidence will improve.”

“I think a soft landing was coming along admirably, and I don’t think the oil price shock is necessarily going to change that.”

“No, I don’t think we are headed for a recession,” agreed Roger Guffey, president of the Federal Reserve Bank of Kansas City. “We at the Fed have been on the track of trying to have a soft landing. . . . I still feel comfortable with the idea of achieving price stability over the long term, and I don’t think policy has or will change at the Fed despite the Middle East crisis.”

Guffey said he thinks the oil shock will reduce the rate of growth in the nation’s gross national product by about 0.5% over the next year, but stressed that he believes the economy should still continue to grow by about 1% to 1.5% throughout 1990, and at a slightly faster rate in the first half of 1991.

Wayne Angell, an influential member of the Fed’s policy-making Board of Governors, agreed that a recession isn’t in sight. He added that he has not yet seen the kind of economic signs that typically come “at the end of the business cycle,” when the economy ceases to expand.

Angell also suggested that higher oil prices should provide incentives for greater investments in some sectors of the economy, partially offsetting reduced consumer demand as a result of the higher prices. He said the price differential between oil and natural gas is now so large that businesses should begin to invest in new equipment to switch to natural gas as a source of energy.

Alan Greenspan, chairman of the Federal Reserve Board, attended the conference here but would not comment on the state of the economy.

But other officials suggested that they now see little dissension at the Fed over the continuation of existing policies, at least until the situation in the Middle East becomes more clear.

“I think the conventional wisdom at the Fed is still that a soft landing can happen, even with $30 (per barrel) oil prices,” added one Fed economist. “But over $30--and we’re now around $31--it becomes less certain. At these prices, it might be more of a controlled crash than a soft landing.”

Still, some top officials argued that, even if the Middle East crisis worsens and turns into a war, inflation, rather than recession, will remain the greater problem facing the economy.

“Can we avoid a recession? Yes,” said Richard Syron, president of the Federal Reserve Bank of Boston. “And even if this crisis should develop into a shooting war, that wouldn’t bring a recession. I don’t know when (a war) has ever happened with a recession at the same time.”

Leading outside economists at the conference also said they believe the Fed has decided not to change policies now.

“I think they (the Fed) will stay firm until they see things more clearly,” noted Allan Meltzer, an economist at Carnegie Mellon University, and founder of the Shadow Open Market Committee, which monitors Fed policy.

Other economists also said that they support the idea that stable policies from the central bank should help the nation avert a recession.

“I think that despite the oil shock, they (the Fed) should stick to their monetary goals, and then we should be able to escape without a recession,” added Martin Feldstein, president of the National Bureau of Economic Research and former chairman of the Council of Economic Advisers under former President Ronald Reagan.