GOP fortunes and the Fed
THIS is the Republicans' big week. Their convention opens tonight in New Orleans. It could well be the beginning of triumph for George Bush. Accepted wisdom, after all, holds that the economy decides most American presidential elections. The steady stream of good news - low unemployment, continuing expansion - has been seen as a powerful indication that the Republicans are likely to retain their lease at 1600 Pennsylvania Avenue.Skip to next paragraph
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And yet an undercurrent of economic uncertainty remains in the stream of popular thinking. Opinion polls indicate a high level of satisfaction with the performance of the economy now, but concern that good times may not last.
For many people, the interest-rate increases of the last few days - the half-point rise in the Federal Reserve's discount rate, to 6.5 percent, and the subsequent increase in commercial banks' prime rate, to 10 percent - show that their concerns have some foundation.
The Republicans will, of course, contend that they have the economy under control. The Democrats have an opportunity to suggest that the glass, which has appeared full if not running over, may be only half full - or even half empty.
Economists have generally hailed the Fed's action in raising the discount rate. As often happens, too much good news piling up has given them the jitters, and they have started to worry that the economy has been overheating.
Inflation is once again cause for concern - as evidenced by July's producer price index, released Friday, which showed wholesale inflation at an annual rate of 5.7 percent.
Better to tighten a bit now than to have to tighten much more later: By dampening discretionary spending (spending now in anticipation of price increases later), the rate hike should help stop the inflationary spiral before it starts.
But the increase is likely to hit the voters in the pocketbook right around election day. Interest-rate changes once took six months or so to be felt by consumers. Nowadays, though, many people's home-equity loan rates are tied directly to the prime rate, and adjustable mortgages are tied if not to the prime, then to some other rate or index linked somehow to a rate the Fed controls.
So the effects of Fed adjustments are felt in perhaps half the time they used to take. The subtleties of small-hike-now-instead-of-big-hike-later may be lost on the voter whose mortgage goes up the morning before election day.