ON Feb. 20, 1990, Federal Reserve Board chairman Alan Greenspan told Congress that "available indicators of near-term economic performance suggest that the weakest point [in economic activity] may have passed." He was wrong, of course. The economy entered a recession last July. That slump, despite the drop in the unemployment rate for April announced last Friday, may not be over.
As spelled out by Mr. Greenspan, the goal of the Fed's policymaking body early last year was "to restrain growth in money and aggregate demand in coming years enough to establish a clear downward tilt to the trend of inflation and inflation expectations, while avoiding a recession."
Now there is no evidence that Fed economists and officials are better than anyone else in forecasting the twists and turns in the economy. So we can't really rap the Fed chairman for being inaccurate in his forecast.
Nor have we ever heard of a top Fed official saying something like this: "What this economy needs is a good recession." Even if some Fed officials thought a recession was necessary to cure the debt binge, the growing inflation, and the other excesses of the 1980s, it would not be politic to say so. Taking the chairman at his word, however, the recession was unexpected and unsought, and perhaps deepened by the Gulf war shock on consumers.
Nonetheless, the Fed has been slow in countering this recession. It has gradually reduced interest rates, usually a quarter of a percentage point at a time. But it lagged in getting the nation's money supply - the fuel for the economy - to grow. Perhaps there was a bit of "macho" central banking present - Fed officials beating their chests and saying to themselves, "I'm tough in the battle against inflation, willing to take the heat of criticism for the national good." That's better than panicking and p umping money into the system like crazy, causing even more inflation. But there must be a middle ground.
In any case, the Gulf war is past, and the money supply for the past three months has been growing at a good rate. Further, the Fed last week trimmed the discount rate it charges on loans to commercial banks, and these banks responded by cutting the prime interest rate they charge better customers to 8.5 percent from 9 percent. Those moves are welcome indeed. This recession already has lasted long enough to lower inflation and prompt some rethinking about the merits of overleveraging with debt.
Whether the recession will end by July, as most economists forecast, or later as some say, we wouldn't dare forecast. We hope it is sooner rather than later.