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Fed policy aggressive bid to slow growth - Meyer

WASHINGTON: Federal Reserve Board Governor Laurence Meyer on Friday described the U.S. central bank's current strategy as an aggressive attempt to slow growth and prevent the economy from overheating.

Meyer said the Fed is trying to slow economic activity to the so-called trend or potential rate of noninflationary growth. Many at the Fed put that rate between 3.5-4.0 percent gross domestic product growth annually.

But Meyer, who is known as an inflation hawk, said slowing growth to trend may not be enough to close the gap between demand and supply and it's possible the Fed may have to push the rate below trend to bring about a better balance.

The Fed's current policy strategy is a two-step approach - first to slow growth to trend and second to respond reactively to higher inflation, Meyer said.

"The current policy is, in my view, also an aggressive version of such a strategy because it is...a forward-looking attempt to prevent further tightening of the labour market," Meyer said in speech prepared for the Joint Conference of the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research in San Francisco.

A text of the speech was made available in Washington in advance of delivery but the event was closed to reporters.

The Fed has raised key interest rates four times since last June in an attempt to slow the blockbuster U.S. economy. But central bankers acknowledge that, so far, the strategy has not had the desired effect. The federal funds rate on overnight lending between banks now stands at 5.75 percent.

Fed Chairman Alan Greenspan said recently the rate of growth in the second half of 1999 could not be sustained without driving up inflation. The economy grew at a blistering 6.9 percent annual pace in the fourth quarter.

Wall Street is now bracing for at least two more rate hikes by mid-year. The Fed has signalled that it will take an incremental approach to raising rates, a promise that it will move in small steps.

Meyer said Fed policymakers should be transparent when they shift from incremental responses to data to more aggressive responses to forecasts.

"My instinct tells me that, as policy becomes less preemptive, it should become more aggressively reactive," he said.

Meyer said one of the greatest challenges for monetary policymakers now is the uncertainty created by a dramatic acceleration of worker productivity.

That shift has thrown into question old Fed theories about the relationships between growth and unemployment on one hand and inflation on the other.

"The key challenge for monetary policymakers during this period, in my view, has been to allow the economy to realise the full benefits of the new possibilities while avoiding an overheated economy."-Reuters