Citing market 'imbalances,' Fed looks set to raise rates

The Federal Reserve has decided to pull the monetary trigger: Its policymakers will raise interest rates at the end of June.

But the decision - made clear by Fed Chairman Alan Greenspan in congressional testimony yesterday - is drawing criticism from many economists.

They believe it will undermine the working poor - just as they're poised to benefit from the longest peacetime expansion in history.

"A terrible idea," says Jeff Faux, president of the Economic Policy Institute, a progressive think tank in Washington, of the interest rate hike. "It will pull the rug out from those workers at the bottom of the rung who are finally getting some benefits from tight labor markets."

The typical worker saw his after-inflation wages decline sharply after 1989. But real wages have increased in the past two years or so as wage hikes outpaced low inflation.

The Fed, at a meeting of policymakers June 29 and 30, is now expected to raise short-term interest rates by 1/4 of a percentage point to 5 percent. Mr. Greenspan reinforced that prospect in his testimony before the Joint Economic Committee of Congress. "There are developing imbalances that give us pause and raise the question: Do these imbalances place our economic expansion at risk?" he said.

While Wall Street reacted with equanimity to the news, economists do think even a small increase will slow the economy a bit. "We are not going to have any major objections to that," says Gordon Richards, chief economist at the National Association of Manufacturers in Washington.

He is concerned, though, that the Fed might raise interest rates back to the 5.5 percent rate of a year ago. "That was excessively restrictive," he says.

Greenspan's argument is that monetary policy works best when it heads off future problems. "It is useful to preempt forces of imbalance before they threaten economic stability. When we can be preemptive we should be, because modest preemptive actions can obviate the need of more drastic actions at a later date that could destabilize the economy."

James Galbraith, an economist at the University of Texas in Austin, says a 1/4 percentage point change won't push the economy into recession. But he's concerned that if Fed policymakers see inflation as a danger, they will push rates up higher when they meet again this summer and fall.

And a slump, he warns, will hurt poor people, including those trying to move off welfare into a job. It will turn the federal budget surplus into a deficit.

Greenspan's triumph - a husky, noninflationary economic expansion - will be turned into a disaster, he says.

Professor Galbraith praises the Fed for allowing the unemployment rate to drop to 4.2 percent, far lower than the level its economists said would give rise to faster inflation.

A major jump in interest rates now would be "a complete repudiation of Alan Greenspan's accomplishments over the past four years," he says. He sees no evidence of inflation rising.

The government's report Wednesday that consumer prices didn't change in May was seen by Wall Street as putting Fed policymakers in an awkward position - that any move would be a fight against a phantom menace. But after their last meeting, the Fed announced a bias toward higher rates. Greenspan, in clearer language than usual, ended any doubts that rates would rise. How much remains uncertain.