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The Fed: A Month Late And A Dollar Short?



After weeks of dithering, the Federal Reserve Board has acknowledged that the U. S. economy needs more help from monetary policy than it has been getting (page 38). The Apr. 30 cuts in the discount rate, from 6% to 5.5%, and in the federal-funds rate, from 6% to 5.75%, were justified as much as four weeks ago, after the release of the March employment report that showed that the pieces of an economic recovery were not falling into place. And they were certainly warranted a week later when the March price reports relieved fears of accelerating inflation.

Already, the 30-day delay in easing may have unnecessarily prolonged the recession. And with signs of weakness still overshadowing those of recovery, it is clear that the Fed has more work to do. Turning the economy around this time will be like reversing the direction of a huge ocean freighter because of the economy's additional cargo of structural problems in real estate, banking, debt, and government finances. And these factors are also likely to put a damper on the recovery, when it finally does get on course.

Those Fed officials who are concerned that further easing could stimulate a robust upturn that would fuel inflation underestimate the unique characteristics of the 1990-91 recession. Inflation is simply not a problem--neither now nor in 1992--with the economy so weak and labor costs continuing to moderate. Then, too, inflation typically begins to fall in the later stages of a recession. If the April data look as bad as the March numbers did, at least one more easing seems necessary, if only for recovery insurance. Let's hope there's no hesitation next time.

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