Sarbanes and the Fed

May 22, 1994

Maryland's Sen. Paul S. Sarbanes has never seen an interest-rate hike he doesn't hate. During his quarter-century in Congress, a lease he hopes to renew in November, he has been as consistent a voice for easy money as the free-silver populists of yore. Each time the Federal Reserve has nudged up interest rates since February, the TV networks knew where to look for sound-bite criticism.

There is little point in trading statistical thrusts with Mr. *~ Sarbanes. For every indicator showing the economy is strong and growing smartly, he can find signs of softness. Instead, we would prefer to challenge him on three specific issues.

* In a letter Monday to Federal Reserve chairman Alan Greenspan, Mr. Sarbanes warned that the impending half a percentage point rise in short-term interest rates could be "a potentially serious blow to the economy." He quoted Thomas Thompson, president of the National Association of Home Builders, as saying the Fed's earlier quarter-point increases "clearly were negative" for his industry.

We called Mr. Thompson after the Fed acted to explore his thinking further. He said he welcomed the Fed's decision to move up short-term rates to stable levels. His previous complaint was based on the Fed's super-cautious quarter-point nudges, which "spooked" the financial markets to raise long-term interest rates contrary to its intention. If long-term rates now head downward, Mr. Thompson anticipates a very nice 7.1 percent increase in housing starts this year. He took note of inflationary pressures, with lumber prices gyrating upward, shortages of cement, drywall and insulation developing and spot labor shortages reported.

Our conclusion: If Mr. Greenspan is right that higher short-term rates will push down long-term mortgage rates, the housing industry will do fine.

* When Alan S. Blinder, the president's nominee to the Federal Reserve Board, appeared before the Senate Banking Committee, Mr. Sarbanes hailed him as "a real-world pragmatist unhindered by ideological preconceptions." Yet in his testimony, Blinder said America paid a high price to bring down inflation from double-digit rates in the early Eighties and "it would be sheer folly to squander [these gains] now." We agree. After the Fed action Tuesday, Mr. Blinder said unemployment, now at 6.4 percent, could fall to 6 percent before wages begin climbing. Ponder that statement from an alleged inflation "dove."

Our conclusion: With unemployment dropping about 0.1 percent month, Mr. Blinder's target for wage-rate inflation could be reached by year's end.

* Contrary to Washington's hopes, the dollar did not firm up on world markets after the Fed increased short-term rates. One reason may be that foreign investors listened to Sarbanes-style complaints and concluded that Congress would undercut efforts head off inflation before it hits.

Our conclusion: Mr. Sarbanes' onslaughts on the Fed have a perverse effect by undermining world confidence in U.S. economic management.

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