A Bit of Stimulation

THE Federal Reserve System's move last Friday to trim loan costs was no surprise. Earlier this month almost three-quarters of a panel of 56 economists surveyed by Blue Chip Economic Indicators predicted the exact Fed action: a chop in the discount rate that the central bank charges on loans to commercial banks from 5.5 percent to 5 percent and a lowering of the federal funds rate, which commercial banks charge one another on loans, to 5.25 percent from 5.5 percent.Moreover, the financial markets had been "on hold" last week in expectation of a Fed move Friday following the release of new economic statistics. Those numbers indicated that an additional easing of monetary policy was in order. Retail sales declined 0.7 percent in August. The consumer price index rose only 0.2 percent in the same month, confirming that inflation is not a major threat to the economy. And the money supply most watched by the Fed, a broad measure known as M2, actually declined by $9.7 billion - something of an extraordinary event in the early phase of an economic recovery. Under chairman Alan Greenspan, the Fed has been carrying out an economic experiment in this business cycle. Usually in a recession, the Fed pumped up the money supply at a rapid rate to stimulate a recovery as fast as possible. This extra fuel meant that the economy grew at a rapid pace for the first several months of an expansion. This time, the Fed has been more chary in providing new money. Several Fed policymakers have a goal of "zero inflation," a term which actually means a minor amount of inflation, say 1 or 2 percent. They figure such low inflation will prompt business to make investment decisions on their economic merit alone and ignore the risks of inflation. This would, in theory, improve the efficiency of the economy. Such a policy, however, is risky. It could produce the famous "double dip" in the economy - a return to recession if businesses and consumers turn too cautious in their spending. From the standpoint of the White House, a zero-inflation policy puts the political future at risk. The administration wants an economy that feels more prosperous by election time in the fall of 1992. If the latest monetary policy action succeeds in moving the economy forward, the Fed could be regarded by the financial community as a hero. The country would have economic growth plus low inflation - a 2 or 3 percent per year rate versus 6.1 percent in 1990. If the experiment fails, the Fed, like a ballplayer who makes an error, will hear a lot of boos.

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