Critics Hit at Fed's Rate Hikes
On car lots and construction sites, most recent increase in interest rates will land hard
WASHINGTON — JUST before the Federal Reserve recently raised interest rates for the sixth time this year, Sen. Byron Dorgan (D) of North Dakota held a rally outside the central bank's office here and blasted Fed Chairman Alan Greenspan for ``wrongheaded'' policies that are ``hurting the economy.''
Mr. Dorgan and his group weren't alone. They were joined by labor leaders, economists, the unemployed, and a host of others who converged on the Fed's imposing limestone and marble headquarters to protest what they say is a systematic squeezing of the middle class.
Now, two weeks after the biggest interest-rate hike (0.75 percent) since the early 1980s, some experts and common folk alike are wondering if the Fed knows something the rest of the world doesn't or even if it has gone too far - and is choking off the economy.
Clark Gottlieb doesn't like the view from his showroom window.
``Alan Greenspan is accomplishing what he set out to do: He's slowing the market down,'' says Mr. Gottlieb, a Silver Spring, Md., car dealer.
Since mid-October, with rates already rising, traffic in the showrooms and the outside lots along Automobile Boulevard have dropped off, Mr. Gottlieb reports. ``Up to 70 percent of our buyers finance their cars, and the higher the borrowing costs, the more it hurts our business.''
After the Fed's Nov. 15 move, most banks raised their prime rates from 7.75 to 8.5 percent. Critics, who see even higher rates coming in January, say the slowing has already begun.
The current Christmas season is viewed as a barometer of the economy's health and the perceived purchasing power of consumers. Yet Thomas Carpenter, chief economist of ASB Capital Management, a subsidiary of NationsBank, says the higher interest rate hasn't registered yet: ``It won't spoil this holiday - buying and vacation plans were already made before the Fed's recent move.''
But further rate hikes in the near term will be burdensome for average Americans, Mr. Carpenter says. ``By the end of January [when Carpenter and others predict yet another Fed increase], some people are going to see $400 monthly increases in their mortgage rates.'' Then, they'll start smarting, he says.
With well over half of Americans owning their own homes, this will affect a lot of people, Carpenter says. ``A good portion of them have mortgages with adjustable rates which they refinanced over the past few years.... Once you affect mortgage interest rates, you are chipping away at the economy's sources of strength.''
Some observers are buoyed by Mr. Greenspan's pursuit of a monetary policy that has proven tight enough to head off inflation. His six rate hikes since February of this year quelled concerns about prices spiraling out of control. In practice, lower interest rates propelled many to purchase more expensive, big-ticket items -
so-called durable goods. And businesses, anxious to capitalize on the uptick in consumption, took advantage of lower borrowing rates to finance their expansion and rebuild inventory.
Changes in the political landscape have made the country's central bankers even more guarded against inflation.
The Fed ``recognizes that they have to preempt the effect of the Republicans coming in and controlling Congress,'' Carpenter says. GOP lawmakers' pledges for a capital-gains rate reduction and cuts in middle-income tax burdens, if implemented, will have ``stimulative effects on the economy,'' he says. While these plans may have had something to do with the Fed's decision to raise interest rates by three quarters of a point instead of the half point most Fed-watchers anticipated, the plans most certainly will be the basis for the Fed's possible move in late January for another rate hike, Carpenter says.
``Too many Americans are still out of work,'' Senator Dorgan said in a recent letter to chairman Greenspan. ``Too many Americans are still underemployed. And yet the Federal Reserve Board seems bent on continuing to take action to put the brakes on the American economy.''
But some observers have already anticipated a slower economy. In its annual survey of the US economy, released last week, the Paris-based Organization for Cooperation and Development (OECD) expects US economic growth to slow as ``pent-up demand for housing and consumer durables, especially cars, is satisfied, disposable income growth falls in response to higher taxes, and the accumulation of business inventory slows from the torrid mid-1994 pace.''
The US Census Bureau has reported a decline in the October data released last week for new durable goods orders - from washing machines to cars. The numbers ``clearly indicate the economy is slowing down,'' says Gordon Richards, chief economist of the National Association of Manufacturers.
``The only possible good news in this excessive interest rate hike is that [the] Federal Reserve may have finally gotten interest-rate increases out of its system, and won't do it again,'' Mr. Richards says.
Don't bank on it, caution critics.