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The only game in town.

The Greenspan Fed has been caught in the middle of election-year pressures, a stubborn recession and a debt-burdened economy in pursuing recent monetary policy. The Fed's 24 moves to ease since mid-1989 reflect its effort to quiet the easy money advocates and drag the economy out of a nagging recession, while avoiding a dollar crisis.

Monetary policy has been--at least until now--the "only game in town" in the government's effort to counter recession and mount a sustainable recovery. Federal Reserve policymakers have faced intensifying political pressures from the Bush administration (and to a lesser extent from Congress), together with unrelenting economic pressures in the form of a double- (maybe triple-) dip slump.

The Greenspan Fed has responded to these pressures by easing its main policy lever--the federal funds rate--no less than 24 consecutive times since mid-1989. However, contrary to past recoveries, these Fed easing actions have done little more than keep the economy from sinking further into recession, rather than stimulating strong economic growth.

This is largely because debt-heavy individuals and businesses are retrenching in the wake of the excesses of the 1980s, and bad loan-plagued banks remain extremely reluctant to make new loans. Also depressing economic activity are large defense spending cuts and permanent job losses. The Fed's easing steps have aided the much needed debt restructuring process, but these "balance sheet" problems may continue to curtail economic growth for some time to come.

Ideally, fiscal policy (changes in government taxes and spending) should also help keep the economy on a sustainable, noninflationary growth path. But, Washington's gridlock between a Republican White House and a hostile, Democrat-controlled Congress, combined with the burden of an already massive federal deficit, have rendered fiscal policy virtually incapable of influencing the economy in a timely manner.

In his August 20, 1992 acceptance speech at the Republican National Convention, President George Bush proposed, for his second term, a pro-growth fiscal policy hinging on "across-the-board" tax cuts, which the president said he will try to couple with spending cuts. Such a plan might give economic activity a boost in the likely event that the president's proposed decline in taxes is promptly enacted by a new Congress, while Bush's hoped-for cuts in federal spending come later, if at all. By contrast, the Democratic candidate for president, Governor Bill Clinton, has proposed sharp, pro-growth increases in federal spending on infrastructure, health care and education, among other things, that are likely to outpace his proposed increases in taxes.

In either case, these election-year, pro-growth, fiscal plans would probably, at least initially, add to an already massive federal deficit. In sum, with new fiscal measures in the wind and with the new threat of a dollar free-fall, the Fed is probably close to the end of the line in its numerous moves to push short-term rates lower.

At the same time, the recent welcomed decline in long-term interest rates spurred by faltering recovery and dormant inflation, is likely to be, at least temporarily, interrupted by political uncertainties. Of great concern to domestic and foreign investors alike is the growing prospect that in the face of an absence of fiscal discipline and a runaway federal deficit, politicians will exert unreasonable pressures on the Fed to keep monetary policy too easy for too long, thereby raising the longer-term threat of renewed inflationary pressures.

More immediately, there is the threat of a disorderly U.S. dollar decline in light of the unusually wide spread by which German short-term rates (reflecting a tightening in German monetary policy) exceed lower U.S. short-term rates (reflecting easier U.S. monetary policy).

Federal Reserve policy

Monetary policy is the government's most flexible and effective policy instrument. Through adjustments in pressures on bank reserve positions (underscored from time to time with discount rate adjustments), Federal Reserve policymakers seek to influence the cost and availability of money and credit. This is done in order to, in turn, affect the course of spending and output, and ultimately inflationary pressures. The Fed's hallowed objectives are stable prices and sustainable growth.

The Greenspan Fed has faced more than its fair share of challenges, including a stock market crash, the savings and loan debacle, the temporary threat of rising inflationary pressures, the Persian Gulf War and more recently a stubborn and prolonged double- (maybe triple-) dip economic slump. As if this were not enough, Fed Chairman Alan Greenspan and his fellow policymakers have had their independence repeatedly challenged by partisan political pressures from the Bush administration, and some congressional quarters as well. Although political harassment of the monetary authorities was most pronounced from mid-1990 through 1991, it has been evident so far in this 1992 election year as well.

As a rule, the more independent a central bank is from partisan political pressures, the greater its anti-inflation credibility and the sounder its currency. To the contrary, when market participants perceive that political pressures are pushing the Fed to the brink of excessive ease--thus posing the threat of renewed inflationary pressures--the yield curve will typically become very steep, commodity prices will rise and the dollar will weaken.

Most importantly, the Greenspan Fed's easing actions (a total of 24 moves since mid-1989, consisting of 6 moves in the second half of 1989 and 18 easing steps since mid-1990) have produced, at best, a slow and shaky recovery. The economic upturn is far from thrilling and its slow pace has not yet been able to tame a high and unruly unemployment rate. In May, the civilian unemployment rate jumped unexpectedly to 7.5 percent from 7.2 percent in April. In June, it surged further to 7.8 percent, before easing back to 7.7 percent in July and to 7.6 percent in August.

The Greenspan Fed's most dramatic policy move occurred on December 20, 1991, when the Fed Board cut the discount rate by a full percentage point to 3 1/2 percent from 4 1/2 percent, accompanied by a partial "pass-through" decline in the federal funds rate to 4 percent from 4 1/2 percent. (The federal funds rate is the rate on bank reserve balances at the Fed that are loaned and borrowed among banks, usually overnight.) Coming at a time of a "double-dip" economic slump, this unusually dramatic Fed easing action triggered a sharp decline not only in short-term rates (over which the Fed has the greatest control), but long-term interest rates as well.

In addition, this Fed action kicked off a wild rally in the stock market. Against this favorable financial backdrop, debt-heavy individuals and businesses were able to engage in a massive restructuring of debt that is absolutely essential for sustained economic expansion. In these circumstances, individuals rushed to refinance mortgages and businesses replaced high-coupon debt with low-coupon debt. In addition, businesses were able to raise funds in the soaring equity market to repay debt.

The Fed's latest aggressive easing actions on July 2, 1992--consisting of a discount rate cut to 3 percent from 3 1/2 percent and a full "pass-through" decline in the federal funds rate to 3 1/4 percent from 3 3/4 percent--has kicked off a second wave of debt refinancing activity. A reasonable estimate is that this essential debt restructuring process, required to dig out from under the excessive debt burden built up in the 1980s, is roughly 65 percent complete for the economy as a whole.

Another positive impact of the Fed's increasingly aggressive easing actions has been to push short-term rates sharply lower relative to long-term interest rates. Starting in mid-1989, the Fed's 24 easing steps have pushed the federal funds rate down to the present level of 3 percent from 9 3/4 percent. In contrast, the long-term, 30-year, Treasury bond yield fluctuated for a considerable period in an 8 percent to 8 1/2 percent range, before easing in the face of anemic recovery and becalmed inflationary pressures to a current range of 7 percent to 7 1/2 percent.

This steep yield curve has contributed to improving bank fortunes. Bank net interest margins have improved as their short-term cost-of-funds have moved far below the longer-term rates on their investments and loans. Initially, banks stepped up their purchases of safe and liquid U.S. government securities. Looking ahead, banks may eventually become more willing to make new loans, thereby hopefully lessening the depressing economic impact of a prolonged credit crunch.

Political influences

Federal Reserve policymakers operate in a vast sea of political pressures. Indeed, the Fed's independence seemingly has been threatened continuously since its inception in 1913. Although the contemporary election-year pattern of political influences on Fed actions is a mixed and inconclusive one, some standout incidents are worth noting. From 1971 to 1972, for example, Fed Chairman Arthur Burns, perhaps the most politically involved of all Fed chairmen, unfortunately agreed to serve as head of President Nixon's Interest and Dividends Committee (set up in connection with Nixon's imposition of price controls in August 1971). Although Burns apparently accepted this job primarily to keep the more unpredictable Treasury Secretary John Connally from doing so, the result was nevertheless a major conflict of interest for the Fed chairman. Wearing his hat as chairman of President Nixon's Interest and Dividends Committee, Burns unquestionably aided Nixon's re-election in 1972 by acting to restrain his fellow policymakers from tightening as much as they otherwise would have.

The political assault on the Greenspan Fed's policy independence began in earnest under the Reagan administration in early 1988. Subsequently, political pressure on the Greenspan Fed built to high intensity under the Bush administration during the period from mid-1990 through 1991. And these pressures have continued in 1992.

Today, political pressures on the Fed reflect in part the harsh reality that the Fed is, by default, the "only game in town" in the effort to mount a sustainable recovery. Certainly, fiscal policy is greatly constrained by an already massive deficit and gridlock between the Republican White House and the Democratic Congress.

It is important to note that the appropriate definition of Fed "independence" is independence within government rather than independence of government. Specifically, the Fed should be independent of the executive branch of government (especially the U.S. Treasury), but not of the legislative branch. In fact, the Federal Reserve, as an independent agency of Congress, is answerable to the people through the legislative branch. Fortunately, the testimony of the Fed chairman and other Fed officials before Congress during the Humphrey-Hawkins hearings in February and July of each year, and on other occasions, appropriately enhances Fed accountability. To be effective, any central bank must be strong and autonomous, but it is also true in our democracy that Fed policies must win a considerable measure of public understanding and acceptance.

Without question, there have been incidents when political pressures on the Greenspan Fed to ease its policy stance could not have been more evident. For example, Chairman Greenspan was furious in February 1988, when, just prior to an Federal Open Market Committee (FOMC) meeting, U.S. Treasury officials contacted Fed officials both informally through phone calls and more formally by means of a letter to all FOMC members on official U.S. Treasury stationary, urging that the Fed ease further to counter slumping monetary aggregate growth or risk an economic downturn in 1988--a forecast that turned out to be incorrect.

In fact, Fed policymakers appropriately ignored these clumsy easing admonitions and instead began a series of tightening moves during the period from March 1988 through February 1989. The executive branch's criticism of the Greenspan Fed grew as these Fed tightening moves escalated. The criticism was led by Richard Darman, director of the Office of Management and Budget (OMB) and Michael Boskin, chairman of the President's Council of Economic Advisers (CEA).

During the second half of 1989, the Fed reversed course and eased its policy stance in six moderate steps. These Fed easing moves were influenced by signs of a slowing in economic activity, especially in the goods-producing sector, along with the hope that inflationary pressures were moderating.

The Fed maintained an unchanged policy stance throughout the first half of 1990, but political pressures began to mount again around the middle of that year. The Bush administration increased pressure on Chairman Greenspan to ease in order to restimulate lagging economic growth and to lessen the destructive effects of the savings and loan (S&L) crisis and declining real estate prices. The Bush administration also wanted Greenspan to ease to counter the potentially depressing economic impact of a prospective budget deficit-cutting agreement that would raise taxes and cut spending (eventually agreed upon in October 1990). The implicit threat in these Bush administration pressures on Greenspan to ease was that he would not be reappointed Fed chairman if he didn't respond.

Thus, the Fed's July 13, 1990 easing move was perceived as, at least partly, political. In contrast with the Fed's usual secrecy, the Fed chairman telegraphed this easing step in congressional testimony the day before on July 12, 1990 while discussing the unrelated subject of deposit insurance. In answer to an apparently eagerly anticipated question, Greenspan read from already prepared notes that he favored an easing move in response to new evidence of a bank-induced credit crunch.

Whatever the motivation behind the Fed's July 1990 easing move, the fact is that, with the aid of hindsight, the Fed's general reaction to emerging signs of recession in 1990 was tardy and timid. It was not until December 1990, for example, that the Fed began to move aggressively towards ease, using all of its three major policy tools, including a lowering of reserve requirements, an easing in reserve pressures through open market operations and a discount rate cut.

Pressures to ease in 1991

The story in 1991 was altogether a different one. In response to a double-dip slump in economic activity, the Fed eased a total of ten times in 1991. While it is difficult to untangle political influences on the Fed from economic influences, it is reasonable to conclude both were strongly at work.

For example, political pressures on the Greenspan Fed could not have been more obvious than in the President's State of the Union address on January 29, 1991 when President Bush demanded "lower interest rates, now." The ink was barely dry on this presidential address when the Fed Board moved on February 1, 1991 to cut the discount rate to 6 percent from 6 1/2 percent, accompanied by a full pass-through decline in the federal funds rate to 6 1/4 percent from 6 3/4 percent.

However, this Fed easing step reportedly triggered heightened controversy within Fed policy ranks. The controversy centered on Chairman Greenspan's assertion that he had the discretionary authority, without a formal FOMC vote, to "pass-through" a corresponding half-point reduction in the funds rate in connection with the half-point reduction in the discount rate. This controversy was largely settled at the subsequent March 26, 1991 FOMC meeting when Greenspan agreed to "full consultation" with other FOMC members concerning the extent of the funds rate "pass through" that should accompany each discount rate cut. Appropriately, this agreement lessened the chances that the chairman alone could be tempted to give in to undue political pressures.

Another more blatant example of direct political influence on Fed easing action came in late April 1991. Specifically, political pressure on the Fed to ease intensified in the days immediately following U.S. Treasury Secretary Nicholas Brady's unsuccessful effort on April 28, 1991 to convince other G-7 countries (especially Germany) that they should ease their monetary policies in order to help pull the U.S. economy out of recession. Having struck out in the international playing field, Secretary Brady focused on trying to get the Fed to play ball in his domestic park. According to press reports, Secretary Brady, in a highly unusual move, telephoned two wavering Fed governors (LaWare and Kelley) and urged them to support another Fed easing move. The Fed caved in and acted on April 30, 1991 to lower the discount rate to 5 1/2 percent from 6 percent, accompanied by a partial "pass-through" decline in the federal funds rate to 5 3/4 percent from 6 percent.

More recently, in 1992, the few Fed actions taken so far, although less significant than in 1991, can also be perceived as being in most cases unduly influenced by election-year political pressures. For instance, on February 18, 1992, the day before Chairman Greenspan's Humphrey-Hawkins testimony and on the same day as the politically charged New Hampshire primary, the Federal Reserve Board announced a cut in bank reserve requirements on transactions accounts to 10 percent from 12 percent, effective on the much later date of April 2, 1992. The Fed chairman apparently wanted to sooth frazzled nerves at the White House and in Congress through this "gift" to the banking system. Greenspan probably hoped that this reserve requirement cut would also help achieve, as with the December 1990 reserve requirement cut, the financial objective of easing the prolonged bank credit crunch.

Following President Bush's March 20, 1992 veto of the Democrats' fiscal stimulus plan, the Bush administration renewed its election-year pressures on the Fed to ease further. (At the same time, Senate Banking Committee Chairman Donald Riegle (D-MI) and Joint Economic Committee Chairman Paul Sarbanes (D-MD) called Greenspan before several televised joint congressional hearings and exerted special pressure on the Fed chairman to ease further.) The Greenspan Fed appeared to succumb to these political pressures on April 9, 1992 when it acted to further ease its policy stance, consistent with a decline in the federal funds rate to 3 3/4 percent from 4 percent. It is important to note that the Fed also rationalized this easing step by citing sluggish monetary aggregate (M-2) growth (though the Fed has subsequently de-emphasized the M-2 aggregate) and weak loan demand.

Subsequently, there was the Fed's surprise move on June 2, 1992 to buy outright U.S. Treasury notes and bonds, paying abnormally high premiums for these coupon issues in order to try to artificially "twist" long-term rates lower, in line with U.S. Treasury election-year wishes.

As recently as June 23, 1992, President Bush, still frustrated by the slow pace of economic recovery (and probably by poor election-year polls as well), called explicitly in a press interview with The New York Times for the Fed to again lower interest rates. On July 2, 1992, on the heels of shockingly weak June payroll employment figures, the Fed Board cut the discount rate to 3 percent from 3 1/2 percent, accompanied by a drop in the federal funds rate to 3 1/4 percent from 3 3/4 percent. Finally, on September 4, 1992, the Fed moved to lower the federal funds rate to 3 percent from 3 1/4 percent through open market operations. This move came on the same day as the release of shockingly weak August non-farm payroll employment figures.

In sum, the pattern of political influence on the Greenspan Fed has persisted since early-1988, but the Fed's response has varied greatly. It is not evident that Greenspan gave into these political pressures to any significant extent in late-1987, 1988, 1989 or 1990. In 1991, political pressures appeared to have had a greater influence on Fed actions, but these political forces merely reinforced Fed easing moves desperately needed to counter recession and mount a sustained recovery. In contrast, the Fed's actions in 1992, though less frequent and less important, seem to have been, with few exceptions, shaped largely by election-year pressures, thereby harming Fed anti-inflation credibility.

Puzzling monetary aggregate behavior

Since late-1982, the monetary authorities have favored the M-2 monetary aggregate as their primary financial intermediate indicator (target). To be sure there have been times, especially during the 1980s, when the relationship between monetary aggregate growth and economic activity has become both unstable and unpredictable, owing mainly to deregulation and financial innovation. Moreover, there was periods in the 1980s when there was a wide divergence between monetary aggregate measures and the broader credit (domestic nonfinancial debt) aggregate. For example, from 1984 through 1989, growth in the broader credit (domestic nonfinancial debt) aggregate far exceeded that of M-2 for a prolonged period.

Special factors serving to depress M-2 growth have recently included the resolution of failing thrifts by the Resolution Trust Corporation (RTC) and the massive shift of funds out of low-yielding, small, time deposits into higher-yielding, capital market instruments. Alternatively, some of the funds pulled out of low-yielding, small, time deposits have apparently been temporarily parked in M-1 balances, resulting in a recent surge in M-1 growth relative to growth in the broader M-2 and M-3 aggregates.

For example, in the first quarter of 1992, the M-1, M-2 and M-3 aggregates grew at widely differing annual rates of 16.5 percent, 4.3 percent and 1.9 percent, respectively. At present, the M-2 aggregate continues to grow at a halting pace below the Fed's 2 1/2 percent to 6 1/2 percent target range for 1992.

The shift in funds out of depository institution deposits into capital market instruments has resulted in a substantial decline in the depository institutions' share of total credit. However, this does not necessarily mean that the economic recovery is being starved for funds. Instead, it means that the source of credit has shifted from depository institutions to the capital markets. For instance, when funds are shifted from small, time deposits to bond funds, the bond funds use these funds, in turn, to purchase corporate bonds, mortgage-backed securities and U.S. government obligations, thereby helping to meet the economy's financing needs.

Taking a longer perspective, depository institutions' share of total credit has been reduced by the combination of major financial innovations, such as securitization and tough regulatory demands associated with the S&L debacle. Specifically, many depository institutions have sought to shrink their asset and liability footings to meet tougher capital requirements, while, in contrast, new capital market instruments, such as mortgage-backed securities, asset-backed securities, junk bonds and commercial paper have flourished.

Most recently, the monetary authorities have apparently decided to de-emphasize the M-2 aggregate and to rely more heavily on other intermediate indicators that move coincidently with economic activity, such as nonfarm payroll employment, when considering adjustments in pressures on bank reserve positions. At the very least, sluggish M-2 growth must be accompanied by unexpectedly weak monthly economic data before the Fed might consider another easing step.

Double (maybe triple) dip

The current economic experience is different from other comparable post-World War II periods of recession and recovery in many respects. Perhaps most striking is the strange shape of the "double-dip" slump, punctuated by anemic periods of recovery. The first "dip" lasted roughly from July 1990 through April 1991 and, more recently, the second dip took place from approximately November 1991 through January 1992.

This unusual pattern of economic weakness contrasts with the normal "V"-shaped recession in which a sharp drop in economic activity is followed by an equally pronounced rebound. Typically, the first year of past recoveries has seen real GDP (gross domestic product) grow at a hefty 5 percent to 7 percent pace.

Another difference can be seen in the fact that the current slump has lasted nearly three years, or three times as long as the average, eleven-month duration of the post-World War II recession. Indeed, the current experience is distinguished by the fact that during the period from the second quarter of 1989 through the fourth quarter of 1991 the annual rate of quarterly real GDP growth failed to exceed a modest pace of 2.5 percent in any quarter, and, of course, in three quarters during this period, real GDP actually declined. (During the period, from the second quarter of 1989 through the final quarter of 1991, real GDP grew at a scant average pace of 0.2 percent per quarter; in the first quarter of 1992, real GDP recorded a larger 2.9 percent gain, before falling back to a 1.4 percent pace in the second quarter of this year.)

In essence, this "double-dip" slump pattern represents retrenchment from the 1980s when, as a country, we consumed more than we produced, and borrowed excessively to finance our high spending. Both public (federal) and private debt soared during the past decade. To an important extent, this borrowing--especially by the federal government--was from foreigners. Now the debt-strangled borrowers must pay the piper.

Moreover, given the already huge federal budget deficit, both Governor Clinton, the Democratic presidential candidate, and President Bush, the Republican candidate, are in a poor position to try to stimulate economic growth through spending increases or new tax cuts. To a significant extent, such stimulative fiscal action could be self-defeating; threatened pro-growth fiscal measures adding to the already huge deficit could unsettle the bond market, with the depressing economic impact (especially on housing activity and business capital spending) of further upward pressure on long-term interest rates.

Furthermore, banks have been unusually cautious in making new loans. The negative political fallout from the savings & loan debacle has intensified government regulatory pressures on banks. In addition to toughening bank capital requirements at the worst possible time in a period of extremely weak growth, bank regulators have gone so far as to threaten to replace senior management of many banks in order to keep them from taking excessive loan risks. Needless to say, this has led to extreme caution in new lending, especially in the case of the many banks already plagued by numerous bad loans. The lingering bank-induced credit crunch further limits near-term economic growth prospects.

Thus, the "double-dip" slump stems from "balance sheet" problems in which financial factors are dominant, in contrast with the typical post-World War II "inventory" recession in which real sector imbalances were dominant. The unwinding of the past decade's excessive credit expansion and asset price inflation (e.g., real estate, stocks, corporate assets, etc.) threatens an all-out credit contraction and asset price deflation. The commercial real estate sector has been particularly hard hit, with high office vacancy rates in many cities and protracted and severe real estate loan problems for many banks, insurance companies and other lenders. In 1991, nonfederal domestic nonfinancial debt (measuring credit extended by both bank and nonbank sources) grew at only a 2.4 percent rate, the lowest pace since 1945.

As can be seen in the accompanying charts, the "double-dip" pattern of the downturn is especially pronounced in consumer sentiment. Indeed, one of the special features of the current experience is that negative consumer psychology seems to have exceeded economic reality. Part of this consumer distress represents the inevitable period of "hangover" following the debt binge of the 1980s and part of it reflects the negative wealth effect of declining real estate prices. Also at work, of course, are major corporate restructuring efforts and big cuts in defense spending, both resulting in heavy permanent job losses, especially in the ranks of skilled and management-level workers.

Consumer psychology is also depressed by the longer-term prospect that the debt-strangled U.S. is on a downtrend in investment and productivity growth, thus threatening the standard of living of our children. The double-dip pattern is also evident in industrial production, nonfarm payroll employment and durable goods orders.

For the economy as a whole, desired debt restructuring and retirement efforts appear to be about 65 percent complete. For individuals, the debt restructuring process may, however, only be about 50 percent complete. In particular, the ratio of consumer installment debt to disposable personal income is down from its record high of 1989, but still far above normal, suggesting that debt-servicing burdens still weigh heavily on individuals. For businesses, which have been able to operate in the capital markets both to replace high-coupon debt with low-coupon debt and to raise money through new equity offerings to retire debt, the debt restructuring process is probably further along--being perhaps 80 percent complete.

Given the lingering nature of the "balance sheet" problems that distinguish this recovery, the completion of this debt restructuring process is absolutely essential to establish a sound base for future sustained economic expansion. In total, this elimination of the debt excesses and the unwinding of asset price inflation of the 1980s is likely to take at least five years, beginning with the stock price collapse of 1989 (when the corporate takeover frenzy came to an end) and continuing at least until 1994.

Housing activity should be given a boost on the heels of the Fed's latest aggressive easing move just as it was temporarily stimulated following the Fed's dramatic easing move last December. A second wave of mortgage activity, both for home buying and refinancing purposes, is already evident. However, this boost in housing activity is not likely to last in the uncertain economic and political environment. Looming political uncertainties pose the threat of declines in stock prices and the dollar, and at least a temporary spike in long-term interest rates.

For at least the remainder of this year and on into next, economic growth likely will be held in check as sober borrowers remain reluctant to take on new debt, and lenders--especially hard-pressed depository institutions--continue to be extremely reluctant to face the risks inherent in making new loans. Indeed, a "triple-dip" slump in the form of another pronounced slowing in real GDP growth, sometime in 1992 or 1993, cannot be ruled out. Of particular note in this regard is the fact that growth in U.S. exports, which previously have been a major source of economic growth, is slowing, owing to pronounced declines in economic growth in the major foreign industrial nations, which more than offsets the positive effect of a declining dollar.

In conclusion, Fed policymakers hope that the numerous easing moves taken so far will promote recovery. While the recovery seems viable for now, its strength is still in doubt, owing to the economy's fragile financial condition. Looking ahead, Greenspan Fed policy moves are likely to continue to be shaped primarily by the twin forces of prospective economic growth and, to a lesser extent, money supply behavior. In addition, Fed easing actions may be moderated (as on September 4, 1992) or perhaps delayed by the near-term threat of an all-out U.S. dollar crisis.

Also, the monetary authorities will, of course, take into account any belated election-year budget negotiations between the Bush administration and Congress, coupled with any proposals for fiscal stimulus by the presidential candidates. Last but not least, Fed officials must seek to avoid both the future inflationary risks of overreacting to the current weakness in the economy, and the perception that the monetary authorities are giving into partisan election-year political pressures.

Dr. David M. Jones is executive vice president and chief economist of Aubrey G. Lanston & Co., Inc., New York.
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Title Annotation:monetary policy of the Federal Reserve System under Chairman Alan Greenspan
Author:Jones, David M.
Publication:Mortgage Banking
Article Type:Cover Story
Date:Oct 1, 1992
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