No reason to panic Wall Street downs-and ups

The Fed should stand pat on short-term interest rates

July 10, 1996

WALL STREET bulls, bears and straddlebugs do not run the U.S. economy and a good thing too. Anyone who follows the yo-yo gyrations of the stock and bond markets -- including the Fourth of July plunge after some very good news -- knows there is always a precise explanation for what has just happened plus some carefully hedged prognostications for what might lie ahead. It's part of the game.

Right now brokerage houses and market tipsters are saying the Federal Reserve just has to raise short-term interest rates -- probably sooner rather than later. Why so? Because unemployment has fallen to a six-year low. Because a whopping 239,000 jobs were added to non-farm payrolls in June. Because hourly non-farm wages jumped a record 9 cents an hour. Because the interest rate on 30-year government bonds has risen above 7 percent.

Of course the primary if not the sole job of sumer confidence is up, that suggests the current uptick in the economy still has a way to go. Isn't that what we want?

An increase in short-term interest rates could indeed slow economic growth from the red-hot 4 percent annual rate in the second quarter. But a fall-off might happen anyway. The full-year growth rate could drop below the 2.5 percent level favored by anti-inflation hawks. There is no reason to panic.

The Fed should stay on the sidelines, if circumstances permit, until after the election. It was wise to keep its rate reductions very modest a few months ago. Current interest levels are keeping inflation in check without choking off the economy. If the markets retreat from their excessively high, low-return levels, so be it. With corporate earnings up smartly, remember that what is bad news on Wall Street is often good news for the rest of the country.

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