How hard to apply the economic brakes?

Going strong: Stock market's drop doesn't seem to have much effect on nation's spending.

May 03, 2000

APRIL'S stock market decline is not likely to deter the Federal Reserve Board from raising interest rates again. When central bankers meet on May 16, they will focus on signs that the U.S. economy continues to move forward despite five interest rate increases in the past 10 months.

Chairman Alan Greenspan may fret about the wealth effect from rising stock market values, but the 30-percent decline in the NASDAQ market is the least of his worries. The economy's continued resilience -- growing at a rate of nearly 6 percent in the first quarter -- unnerves him and his Fed colleagues more than any rise in stock values.

A year's worth of tightening monetary policy has not had much impact yet. Durable goods orders -- for big-ticket manufactured goods that last more than three years -- jumped in March. If volatile transportation orders (which includes airplanes) were excluded, the index rose for the fifth consecutive month.

Tighter and more expensive money is supposed to discourage new orders. Instead, it appears that orders for everything from airplanes to computers poured into the nation's factories. Orders for electronic equipment (including semiconductors and home appliances) rose nearly 10 percent, the largest increase since November.

Clearly, businesses would not be placing such orders if they believed the nation's consumers were cutting back on purchases. Personal income and spending were robust in March. Americans, whose income rose 0.7 percent in the month, will continue to buy houses, cars, computers and wireless phones despite falling stock prices. The higher cost of money has not curbed their spending.

So Mr. Greenspan and his colleagues believe they have little choice but to tighten the monetary spigot once more. They are rightly worried that continued strong economic performance will upset the nation's nine-year "goldilocks" economy.

The only question remaining is how many more rate hikes are necessary to cool down this roaring economy and forestall inflation.

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