No rate hike needed now

Policy dilemma: Federal Reserve could curtail recovery if it decides to raise interest rates to stem inflation.

April 20, 1999

PRESSURE is building again for the Federal Reserve to raise interest rates. Though little evidence suggests that the economy is overheating and inflation is reigniting, the chorus for raising interest rates is getting louder. Federal Reserve Chairman Alan Greenspan should ignore those calls and leave rates where they are.

Sure, some worrisome signs have surfaced. The economy is extremely strong in the ninth year of the current recovery. In the last quarter of 1998, the economy grew at an astounding rate of 6.1 percent. Such a robust performance is more typical of the start of an economic recovery rather than its latter stages. The stock market continues to climb to unprecedented heights. Asian and Latin American economies are showing signs of recovery.

Nonetheless, the Fed's Open Market Committee, the manager of the nation's monetary policy, is preoccupied with the possibility that the economy will overheat. Even though it voted to leave interest rates unchanged at the last meeting, its members have spent a great deal of time recently discussing whether the time had come to raise rates. They are concerned that last fall's rate cuts, in response to weakening economies overseas, may have been too deep. Some of the Fed's Board of Governors are arguing that raising short-term interest rates would be a good dose of preventive medicine.

Rather than worry about stamping out inflation when prices and wages are relatively stable, the Fed's policy-makers should focus on fostering economic expansion. Although low unemployment, factories working with little unused capacity and strong consumer spending have in the past been harbingers of inflation, that doesn't seem to be the case today.

Raising short-term rates would surely throw cold water on the red-hot stock market and could possibly slow the economy. For nearly a decade, the Fed has been adept at maintaining the appropriate monetary policy to maintain a strong economy. Why risk damaging this recovery to stem inflation that has yet to surface?

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