Why public is unfazed by Fed's rate hikes

Central bank is poised to raise interest rates for the fourth time in six months.

Americans are finding it harder to buy a car or a house. Credit-card bill are going up. Eventually, some people may even lose their jobs. But probably, no one will say a word in protest.

The fourth interest-rate hike in six months is likely to come tomorrow or Wednesday. On Tuesday, the Senate is expected to confirm Alan Greenspan's fourth term as chairman of the Fed. The juxtaposition of events points up the fact that few US institutions enjoy such unquestioning support as the Federal Reserve. It may be the closest thing in America to the medieval notion of "divine right."

The lack of picket lines outside the Fed's marble temple in Washington comes down to one simple fact, experts say: Many Americans do not understand how the Fed conducts monetary policy.

Though Fed policies are discussed widely in financial circles and among economists, they rarely become matters of vigorous public debate. They have not been an issue in the presidential primaries, for example.

"The fact that most Americans are in the dark about the Fed's connection to their livelihoods doesn't change the profoundly political nature of its decisions," says author William Greider.

The Fed's decisions have large consequences for most Americans. Economists, for instance, usually blame restrictive Fed monetary policies for causing past recessions. And high unemployment tends to depress wages.

"What we are really saying is we will throw people out of work - purposely," charges economist Barry Bluestone of Northeastern University in Boston. Maybe those people should get Purple Hearts for "paying the price" in fighting inflation, he says.

If Americans understood that monetary policy affects the unemployment rate, they would demand "a representation for elected officials in the determination of this crucial policy," says Mark Weisbrot, co-director of the Center for Economic and Policy Research, a Washington think tank.

Fed actions affect individuals and industries differently.

Bankers and others in the lending business often benefit, for example. "They have never seen an interest rate they don't want to see raised," jokes James Galbraith, an economist at the University of Texas, Austin.

Thus it's not surprising that most bankers, other executives of financial firms, and their economists approve of the Fed tightening monetary policy. They see the economy racing ahead at too fast a pace.

The gross domestic product, the national output of goods and services, rose at a sizzling 5.8 percent annual rate last quarter.

But Mr. Weisbrot maintains that bankers and bond holders have a dominating influence on the Fed.

Financial spinach?

Securities industry analysts have a more mixed reaction to interest-rate hikes, many seeing them as a sort of necessary evil. Mr. Bluestone characterizes the attitude as, "Yeah! Raise interest rates and knock the stock market averages down 1,000 points."

Some industries, such as construction, automakers, home furnishings, and many manufacturers, are hit especially hard by higher interest rates.

"They should leave monetary policy unchanged," says Gordon Richards, chief economist of the National Association of Manufacturers, in Washington.

Nor is organized labor happy with the Fed's expected move.

David Smith, policy director at the AFL-CIO, says an interest-rate hike would be "foolish" when the economic expansion is providing "enormous benefits" to consumers and workers. Industrial capacity is growing, and 900,000 jobs were created last quarter.

"The 4.1 percent unemployment rate should make us happy, not nervous," he says.

As for pickets on Constitution Avenue at the Fed, Mr. Smith says he's not sure it's necessary to make labor's views known. John Sweeney, president of the giant labor federation, has seen and written Greenspan to express his opinions, Mr. Smith notes.

A minority of economists, tending toward left of center or adhering to supply-side economic theories, also disapprove of tighter money. They contend the economy can grow at a fast pace without inflation.

"We are all going to regret it if Greenspan pulls the plug on this economic expansion before it had to die," says Weisbrot. He worries the Fed's tightening will endanger an upturn that becomes the longest ever tomorrow.

Those opposing higher interest costs argue partly on economic grounds.

Tom Schlesinger, executive director of the Financial Markets Center in Philomont, Va., for instance, says inflation remains the lowest since 1965. Job markets are tight, but wages aren't accelerating. There are signs of a moderating economy.

High oil prices, higher rates

The NAM's Mr. Richards figures the Fed will raise the Federal Funds rate on overnight loans between commercial banks from 5.5 percent to 5.75 percent because of rising oil prices and the complete absence of any negative Y2K impact on the economy.

But, he adds, oil prices will fall later this year as non-OPEC oil supplies pick up. And with a handsome 2.5 percent annual productivity gain and a modest 3.6 percent rise in labor costs, underlying inflation will remain a mere 1.1 percent, he says.

Bluestone sees no need for "all this fretting about running out of labor." The unemployment rate, now at 4.1 percent, is no longer a good measure of tightness in the labor market, he says. That's because the percentage of all adult men who are working has begun to rise instead of fall.

Further, workers are putting in more hours to offset weak wage gains or out of fear of losing their jobs. They take second jobs or accept overtime when offered.

"We are not overheating," says Richards. "We are close to the equilibrium path of the economy."

If the Fed is concerned about a "bubble" in stock prices, Mr. Schlesinger says, it should raise the margin requirements on loans to buy stock - not raise interest rates for all Americans.

When Sen. Charles Schumer (D) of New York last week expressed concern about investors buying stock with money borrowed from brokers, Greenspan responded that he had no plans to change margin requirements The Fed, though, has launched a study of the issue.

Economists at Prudential Economics, Newark, N.J., are an exception to the Wall Street consensus that the Fed needs to raise interest rates. Indeed, they say rates are too high.

"We are pretty much out on a limb," says economist Gary Bigg .

Prudential figures the economy is already slowing, with weakness in retail sales, durable goods, construction, and international trade.

(c) Copyright 2000. The Christian Science Publishing Society

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