Federal Reserve Gov. Lyle E. Gramley said yesterday that the present course of monetary policy will permit the economy to grow fast enough in 1985 to reduce unemployment without making inflation worse.
Gramley said that the nation's "long-run growth potential is probably around 3 percent or a little less" but that in 1985 the economy can expand at a rate above that because it is not operating at full employment levels.
Addressing a conference in Denver, Gramley declared, "The 4 percent growth rate estimated by the Commerce Department for the fourth quarter . . . suggests that the economy has begun to emerge from its recent period of sluggish growth. Moreover, we appear to have headed into the new year with added momentum." A copy of his speech was made available here.
Some economists and politicians, including Rep. Jack Kemp (R-N.Y.), have complained that the Federal Reserve, out of a fear of inflation, has not been providing sufficient amounts of money to allow the economy to expand as it should. In particular, there have been assertions recently that policy makers at the central bank regard a 3 to 3 1/2 percent inflation-adjusted rate of growth of the gross national product as a sort of speed limit and would resist a more rapid expansion.
Gramley's speech, as well as remarks in recent weeks by Fed Vice Chairman Preston Martin and Gov. Martha Seger, suggest that is not the case -- at least so long as there is no evidence that inflation is about to accelerate.
"I certainly would not say that 3 percent or 3 1/2 percent is any sort of speed limit" under current circumstances, another Federal Reserve official said.
Critics of the Fed who have focused on those numbers have done so partly because the Fed said in its semiannual report to Congress on monetary policy last July that the "central tendency" of the economic projections of its policymaking group, the Federal Open Market Committee, for real GNP growth in 1985 was 3 to 3 1/4 percent.
The FOMC does not produce an official economic forecast such as those made public early each year by the president and his economic advisers. The Fed always has resisted the notion that the projections in its monetary policy reports represent either an official forecast or a policy goal.
However, Fed officials concede that the figures actually appear to contain elements of both. Presumably, if a projection were not acceptable to FOMC members, who are polled for their personal views about the outlook, they would seek to try to improve it, said one policy maker who asked not to be named.
When the projection of 3 to 3 1/4 percent real GNP was released last July, the economy had just experienced two quarters of extremely rapid growth and there were no signs yet of the slowdown in growth that began about that time. For instance, the central tendency among the projections of the individual FOMC members for the level of unemployment in the fourth quarter of 1984 was 6 3/4 to 7 percent, whereas the actual rate turned out to be 7.2 percent. Thus, there is more slack still in the economy currently than the FOMC members generally expected.
Similarly, the projection of 3 to 3 1/4 percent real growth for 1985 was paired with one for the GNP implicit price deflator -- a very broad measure of inflation -- of 5 1/4 to 5 1/2 percent. Last year, the GNP deflator rose only 3.5 percent, less than the 4 to 4 1/2 percent expected by most FOMC members.
Although other FOMC members will not be polled for an updated projection until their next meeting on Feb. 12 and 13, Gramley said in his speech, "I am . . . optimistic that the inflation rate will not move up appreciably this year and, with a little luck, it might move down."
Gramley cautioned that a "substantial decline" in the value of the dollar on foreign exchange markets "could worsen the inflation outlook." And he added that the impact of the dollar's high value has hurt some sectors of the economy and some regions of the country because of increased competition from abroad.
But to the extent that inflation remains lower than expected and unemployment higher, some Fed policy makers would welcome real output growing at more than a 3 or 3 1/2 percent rate, as it did in the fourth quarter, when the rate was 3.9 percent.
As Gramley declared, "Overall, the course of this recovery . . . looks quite satisfying."
Added another policy maker, "Things look so good right now that it makes you sort of nervous. You can't help but look around and say 'what can go wrong?' "