Right Move at the Eleventh Hour

TIME Board of Economists generally backs the Fed's decision

Belated and drastic, but unavoidable. That is the majority opinion of TIME'S Board of Economists about the Federal Reserve Board's severe credit-tightening moves. Only one of the ten board members flatly opposed the new policy. The rest generally thought the Fed's actions would help bring down inflation at last, though slowly, at the price of a recession that most still believe will be less severe than the 1973-75 slump, but deeper than was thought a few months ago. Several cautioned, however, that continued turbulence in financial markets and the economy make the outcome unusually difficult to predict. Their individual views, running from the most to least enthusiastic:

BERYL SPRINKEL: "I'm delighted," says Sprinkel, executive vice president of Chicago's Harris Bank. "The Fed's actions greatly increase the odds of getting inflation under control in the longer run." Sprinkel has long argued that the old policy of trying to control the money supply by fine-tuning key interest rates often forced the board to pump more funds into the economy than it wanted to, thus aggravating inflation. "Now that they are focusing on central control of [banking] reserves," he says, "and assuming they follow through, I think it assures that we are going to have more stable money growth." Sprinkel adds that the new policy will reduce the inflationary expectations of consumers, businessmen and domestic and foreign financiers. "If you can get expectations down sooner," says he, "the cost of the renewed recession will be less severe than if those expectations had not been dented."

DAVID GROVE: "I applaud," says Grove, a private consultant and senior economic adviser to Marine Midland Bank. "A slow and gradual approach to curbing inflation would not be very effective. I prefer a quick and dirty approach, and the Fed's actions are very much along that line. They will give the domestic public and foreigners the sense that we really are going to come to grips with inflation." Grove concedes that a dramatic and determined" credit squeeze would depress business activity and push up the unemployment rate. He also thinks the stock market had good reason to flop: "Some of the doubting Thomases who believed we would have at most a mild recession now realize we are going to have a real recession that could significantly reduce profits." Nonetheless, Grove, like Sprinkel, believes that the recession will be less severe than it would have been had inflation been allowed to rage on unchecked.

ALAN GREENSPAN: "The Fed had no alternative," says the former chief economic adviser to President Ford. "The new reserve requirements are significant because they will increase the cost of Eurodollars, which have been one of the major sources of funds flowing into the United States," pumping up credit availability and increasing inflation. "But the key and by far the most important change is to switch to a policy of constraining money supply as distinct from manipulating interest rates." Greenspan grants that "for an interim period, interest rates could be highly unstable; the prime rate could easily go up to 16%." But he would have gone further than Fed Chairman Volcker: "I would also have announced some major curtailments of federal subsidy programs for credit, such as programs to subsidize mortgages and student loans." He predicts that the chairman will stick to his stern policy: "Volcker is a tough guy, although pressures on him to soften his position are likely to mount."

ROBERT TRIFFIN: "Controlling the money supply is the best way to fight a recession," says this international money expert. "Certainly, initially, if we are to brake inflation, there will be some difficult periods to go through. The sooner, the faster we do it, the less gradual approach we adopt, the better chance we have to succeed, to turn the corner. I am very encouraged that part of Volcker's approach is an attempt to deal also with the problems posed by the Eurocurrency market. He emphasized more than before the rate of money supply growth on this market, rather than interest rates. That is the right emphasis."

OTTO ECKSTEIN: "The Federal Reserve is taking a tremendous gamble with the economy, that they will succeed in licking inflation without creating another recession as deep as 1974," says Eckstein, a master of computerized forecasting who runs his own company. "They are finally jamming on the brakes, having done too little for a long time." But late as the switch is, Eckstein believes, "it's going to work. The chances are the inflation rate, currently 13.1%, will drop below 9% by February." But Eckstein sees a darker side: "There is no question that the economy is now going to turn down quite sharply. We are forecasting that unemployment, now 5.8%, will hit 8% by the second half of next year." Still, Eckstein thinks that the recession will be a bit less bitter than in 1973-75. "The use of credit by business has been considerably more cautious, inventories are not anywhere near as high as they were in 1974, capital spending has not been that excessive, housing activity has not been excessive, so the [current] exposure of the private economy is a lot less."

ARTHUR OKUN: "Sometimes I understand this economy and sometimes I don't," laments Okun, senior fellow of the Brookings Institution in Washington, D.C. "I was dead wrong," he admits, in expecting unemployment to go up in September. Instead it dropped, indicating that the economy was far more resistant to a downturn that might check price boosts than had been supposed. Consequently, though Okun is usually vehemently opposed to a policy of relying primarily on money-supply policy to combat inflation, he proclaims himself "not horrified" by Volcker's actions. Okun fears that "interest rates could become so unstable as to be a major source of disturbance in the markets," but hopes that businessmen will now stop an inventory buildup that he judges to be troublesome.

MURRAY WEIDENBAUM: "I really don't have any criticism of Volcker's approach," says this visiting scholar at the conservative American Enterprise Institute. "The Fed, by and large, is the economic bastion of strength and savvy in Washington." Up to now, he says, the Federal Reserve has been following a policy of "expensive easy credit," meaning high interest rates, but free availability of funds; direct control of the money supply, he asserts, is preferable. But Weidenbaum cautions that there is "no guarantee" the new policy can bring down inflation, while in his mind it produces "more certainty" of a recession. Weidenbaum had thought the recession would last through next spring; now he feels it might drag on through next summer.

WALTER HELLER: "I think the Fed got itself in a position where it had to do this," says the University of Minnesota professor who was President Kennedy's chief economic adviser. "If they had done any less, the world markets would have responded terribly negatively. Yet the costs are high. The Federal Reserve is taking the agony route to lowering inflationary expectations: squeezing down total demand in the economy, thereby weakening both product and labor markets. Increasingly people are going to be squeezed out of [credit] markets at those astronomical interest rates." Heller does not, however, expect "a full-fledged credit crunch like we had in 1974." He also thinks that the U.S. can avoid a recession as deep as that year's, though only if Washington acts to ease its bite by cutting taxes.

JOSEPH PECHMAN: "Volcker is headed in the right direction," says the director of economic studies at Brookings. But Pechman fears the move will increase chances that the recession will be longer and deeper than expected. He says that "unemployment will hit 8% sooner than expected" and might go even higher. To curb inflation without pressing down too hard on the economy, Pechman wishes that the Carter Administration would institute a more vigorous wage-price policy to supplement the Federal Reserve moves. Says he: "We ought to try, somehow, to have business and labor moderate their price and wage demands."

ROBERT NATHAN: "Overkill, overkill, overkill," rumbles Nathan, a consultant to domestic and overseas corporations and governments and the one flat-out opponent of the Federal Reserve actions on TIME'S board. Says he: "The rise in the discount rate and the rise in reserve requirements will not have much effect on the price of food or the price of energy, and will further inflate the cost of housing." Nathan believes that the measures will not only not bring down inflation, but that they will not even help the dollar for long. "I think that six months from now they [Federal Reserve officials] are going to be desperate about what to do with the dollar." Meanwhile, in Nathan's view, the new Fed policy "almost guarantees a deeper and longer recession --down and out through 1980." Unemployment, he feels, will rise to 9% by the end of 1980 and may continue that high into early 1981. To curb inflation, Nathan would clamp on wage and price controls for a year and a half. Says he: "I honestly think that even a freeze for a year, a year and a half, with a moderately soft economy, would be better than this overkill."

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