Federal Reserve Gov. Martha Seger yesterday told an American Bankers Association conference that the current sluggishness in the economy does not mean that the expansion is ending and that unrestrained money creation by the Fed would not help the economy's current problems.
Seger said that any relief from faster money growth and the decline in interest rates it would cause would be short-lived, because greater inflationary expectations and higher actual inflation would be reflected in upward pressure on interest rates.
Seger's remarks contrasted with those late last month by Fed Vice Chairman Preston Martin, who warned that the nation was on the verge of a "growth recession" in which output is not great enough to prevent an increase in the unemployment rate. As a result, Martin said that faster money growth and lower interest rates may be needed.
"A growth recession must be considered a real threat," Martin said. "In fact the data currently available suggest that the economy is on the edge between healthy, sustainable growth and a growth recession."
Earlier this week, Commerce Secretary Malcolm Baldrige said that the economy will not grow as fast this year as the Reagan administration originally expected. He said that the economy will grow at a rate between 3.5 and 4 percent. The White House has targeted growth at 3.9 percent for this year.
Baldrige also said that he expected growth to pick up somewhat in the second quarter from the weak 1.3 percent performance during the first three months of the year. Baldrige said he expected second-quarter growth of 3.5 percent.
Baldrige's estimate was close to growth forecasts of the members of the Fed's policy-making Federal Open Market Committee, who said growth this year would range between 3.25 and 4.25 percent. Most of the members' estimates clustered around growth between 3.5 and 4 percent.
Economists appear to be divided into two camps, much as they were after the weak 1.6 percent growth in gross national product in the third quarter of last year. Some economists have said that the economy will continue sluggishly because of the drag of imports on domestic production. Although domestic demand is strong, it has shifted away from domestic-made goods to foreign products.
Other economists have said that looser money growth by the Fed last fall will lead to higher growth during the second quarter of this year. In addition, economists in this camp have said that imports will not grow as quickly between the first quarter and the second quarter as they did from the fourth quarter of last year to the first three months of this year. That should help domestic production, these economists said.
Meanwhile, Martin said in a speech in Tokyo yesterday that he favors further deregulation of the financial services industries in the United States and abroad. If such deregulation continues, international financial flows will become more efficient and individual and business customers will be better served, Martin said.
However, until these long-term benefits are realized, some companies will fail or merge with other institutions because of deregulation, Martin told a group of Japanese bankers.
"The U.S. transition was not balanced and the time to adjust was too brief," Martin said. "Test your strategic planning as to the best market niche or combination of services which will enhance your market share. No management can adequately achieve high performance in every field of activity the regulators may permit."