Fed May Be Willing to Tolerate More Inflation

As catch phrases go, “opportunistic disinflation” is certainly a mouthful. But a new Federal Reserve Board paper on the subject has the economics world buzzing.

Some see it as a sign that hawkish Alan Greenspan and his colleagues may be willing to tolerate a little more inflation in the name of higher growth and more jobs.

“When inflation is low but still above the long-run objective, the Fed should not take deliberate anti-inflation action, but rather should wait for external circumstances--such as favorable supply shocks or unforeseen recessions--to deliver the desired reduction in inflation,” the report says.

The paper, prepared by two Fed staff economists, calls the proposal a “new approach to monetary policy” and says it could be best described as an “opportunistic approach to disinflation.”

Officials at the Fed stressed that the document is only a staff study and does not represent the official position of the Fed’s primary rate-setting group, the Federal Open Market Committee.

Some private economists, however, said they are worried by the implications of the Fed article. Fed Chairman Greenspan has jealously guarded the central bank’s inflation-fighting reputation, going so far as to launch a preemptive strike in 1994 against inflation even though critics charged he nearly shoved the economy into a recession to battle a nonexistent threat.

These economists argued that if this paper became official Fed policy, it would raise concerns in financial markets about the central bank’s inflation-fighting resolve.

“If the Fed were truly following this approach, the risk of an outbreak of inflation would appear greater than it would have been under the more traditional approach to policy,” said Marilyn Schaja, an economist at Donaldson, Lufkin & Jenrette in New York.