Fed Acts to Hike Interest Rates : Economy: Central bank’s move is its second attack on inflation in two months. Analysts praise action to ease rapid growth but critics fear a disruption in recovery.

In its second preemptive strike against inflation in two months, the Federal Reserve moved Tuesday to raise short-term interest rates by another one-quarter of a percentage point.

Although many analysts hailed the move as prudent at a time of rapid economic growth nationally, critics, including some economic policy-makers in the Clinton Administration, worry that the independent central bank’s preoccupation with the possibility of rising prices will disrupt the national economic recovery.

The stock market, which fell 96 points when the Fed last raised rates on Feb. 4, took the latest increase in stride, with the Dow Jones industrial average falling only 2.3 points. And long-term interest rates, which rise when investors fear future inflation, fell by a substantial one-tenth of a percentage point.

In Tuesday’s action, the Fed’s Federal Open Market Committee voted to raise its benchmark federal funds rate to 3.5% from 3.25%.

Federal Reserve Board Chairman Alan Greenspan did not mention the size of the increase when he announced that the Fed’s policy-making committee had decided in closed session to nudge rates up.

But the federal funds rate, which banks charge each other for overnight loans, immediately moved to 3.5% in financial markets. The Fed has effective power to fix this rate by adding or withdrawing cash from the banking system.

The Fed’s rate hike had been widely anticipated by Wall Street, where analysts believe that Fed officials are determined to maintain a tight stranglehold on inflation before it gets out of hand as the economy revives in 1994. In fact, most analysts now predict that the Fed will continue to raise rates throughout the year.

“I think this was just Step 2 in what I think could be a six-step process of quarter-point rate hikes over the next year or so,” said David Wyss, an economist with DRI-McGraw Hill, a Lexington, Mass.-based economic forecasting firm.

Most economists now expect the Fed to raise the federal funds rate by another full percentage point, to 4.5%, by early next year.

Analysts believe the rapid pace of economic growth at the end of 1993 and the beginning of 1994 has convinced the central bank that it must act now to head off rising prices. In the fourth quarter of last year, the nation’s economy grew by 7.5%, the fastest quarterly pace in a decade.

“The Fed is trying to stay ahead of the curve on inflation,” noted Stanford economist Michael J. Boskin, former chief White House economist in the George Bush Administration. “I think the Fed is on the right course. If the Fed doesn’t act now, it will have to catch up later with much bigger and more sudden interest rate hikes.”

Wall Street seemed especially happy that the Fed moved aggressively even after Greenspan met privately with President Clinton and his economic advisers last Friday. Speculation had been swirling around Wall Street that the White House was trying to pressure Greenspan not to approve another rate hike.

However, while Wyss and other economists believe the Fed’s actions so far have not endangered the recovery, they warn that continued rate hikes could result in a slowdown in 1995. DRI-McGraw Hill, for example, now predicts the economy will grow by about 4% this year but only by about 2% in 1995.

“The slowdown we see in 1995 is because we see higher rates coming,” said Wyss.

White House officials declined to criticize the Fed’s latest decision publicly except to say that they saw no signs of a resurgence of inflation.

But privately, officials were less supportive of the Fed’s actions than they were following the first rate hike in February. To calm the financial markets, the White House at that time explicitly sought to play down its differences with the Fed.

“I think it was a very close call,” over whether the Fed should have acted now, said one senior Administration official. “There was not an overwhelming case to be made either way on this one.”

Greenspan’s decision to announce the rate increase publicly, as he did with the last rate increase on Feb. 4, was uncharacteristic. Greenspan’s new willingness to reveal Fed rate changes comes at a time when the central bank is under increasing pressure from Congress to disclose its policy actions promptly to the public.

House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) is determined to force the Fed not only to disclose its actions to the public but also to submit to his proposal to limit its autonomy.

Gonzalez is sponsoring legislation requiring that the presidents of the Fed’s 12 regional banks be appointed by the President. Their role in monetary policy-making is significant because five of them serve on a rotating basis on the Federal Open Market Committee, which makes key decisions about interest rates.

Unlike the seven members of the Fed’s board of governors, who also sit on the Open Market Committee, the regional bank presidents are not presidential appointees.

Clinton has two vacancies to fill on the Fed’s board of governors, giving him an opportunity to put his own allies inside the Fed for the first time since his election. He has already approved the nomination of White House economist Alan Blinder to become Fed vice chairman, but he has not selected a candidate to fill the second vacancy.

Administration sources said they hoped to have Blinder in place at the Fed in time for the Fed’s next Open Market Committee meeting. That could mean that Tuesday’s session was the last in which the Administration did not have a voice.

* U.S. TRADE DEFICIT SOARS: January imports lead exports by more than $6 billion. D1