12/09/96 THE FED'S MEYER SAYS RELAX. HE OUGHT TO KNOW

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THE FED'S MEYER SAYS RELAX. HE OUGHT TO KNOW

Overextended consumers. Slowing corporate profits. Slumping home sales. Some economists suddenly see all sorts of threats to a six-year-old expansion that until recently was deemed rock-solid.
Not to worry, says one of the nation's premier economic forecasters, who now has the power to steer the economy. ''There's nothing that suggests to me the potential of a recession,'' Federal Reserve Governor Laurence H. Meyer told BUSINESS WEEK in a Nov. 22 interview, one of the few he has given since joining the central bank in July.
Meyer's views are worth noting. As a private forecaster in St. Louis, he earned a reputation as one of the nation's shrewdest readers of economic tea leaves. And given his record, some Fed watchers predict that the Clinton appointee could become a key player within the central bank's policymaking Federal Open Market Committee.
''A LOT OF CUSHION.'' For now, Meyer sees nothing on the economic horizon that requires a change in the Fed's stand-pat policy. With consumer confidence strong, long-term interest rates falling, and the economy showing few imbalances, the 52-year-old Bronx native with a PhD in economics from Massachusetts Institute of Technology seems content with the status quo. ''We're beginning to see signs that consumers are a little stretched out, but not enough to push us into a downturn,'' he says.
While some Fed officials have been nervous since spring about the frothy stock market, Meyer appears calm. A sharp correction would dampen consumer spending, he says, but it wouldn't be enough to push the economy into recession. And with growth at a robust 2% to 4% in recent quarters, he feels the economy has ''a lot of cushion'' to absorb any stock-market shock.
For 1997, Meyer figures the economy will cool to under 2% growth, down from about 2.7% this year. And he says such a slowdown isn't all bad: With the unemployment rate at a seven-year low of 5.2%, he worries that wage pressures are building enough to drive up prices--even if the economy cools next year.
GREENSPAN ALLY? A slowing economy could nullify the need for the Fed to raise rates. While Meyer won't discuss prospective Fed policy, former colleagues at his consulting firm--now called Macroeconomic Advisers--say Meyer's forecasting model shows no need to change Fed policy in 1997. ''It's hard to see the event that would cause the Fed to tighten,'' says ex-partner Joel Prakken.
Meyer seems unlikely to publicly challenge Fed Chairman Alan Greenspan--as had former Vice-Chairman Alan S. Blinder, another Clinton appointee, who quit the Fed earlier this year. Indeed, at a critical FOMC meeting on Sept. 24, Greenspan is believed to have counted on Meyer--whose model was predicting a slowdown--as an ally against FOMC hawks bucking for a rate
hike. In the past, Greenspan has privately joked that his favorite
Fed governors are those who lack economics PhDs--presumably because they can't challenge him intellectually. But if Meyer's forecasting remains as sharp as it has been in the past, he may turn out to be one PhD Greenspan will learn to love.
By Dean Foust in Washington

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