Please Stop, Enough Is Enough : Yet another interest rate hike from the Fed

Enough is enough. The Federal Reserve Board has raised short-term interest rates seven times since last February, pushing them to their highest level in four years. And, believe it or not, still another increase is in the wind.

The Fed’s unrelenting campaign has been aimed at moderating the nation’s economic expansion, which untamed might trigger rampant and destructive inflation. A noble cause, but now the Fed ought to sit tight and not boost rates further. Certainly California, still struggling to recover from a deep recession, doesn’t need the dampening effect of rate hikes.

With inflation well under control at an annual rate of 2.7% at the end of 1994, the Fed should allow time for the string of rate increases to have its effect, an effect that only now is beginning. The Fed’s latest hike, half a percentage point, had been widely expected, but the result for consumers and most businesses--higher interest rates for business loans, mortgages and credit cards--is yet to come. So the threat of yet another Fed increase at or before its next meeting, in March, creates substantial uncertainty in the financial markets and in planning for business and home buying.

Many economists are describing the Fed’s strategy of preemptive strikes against inflation as overkill. Wednesday’s increase came out of a Fed assumption that economic growth above 2.5% a year and an unemployment rate under 6% cannot be sustained without fueling inflation. The national jobless rate was 5.4% in January and economic growth was 4.5% in 1994’s final quarter.

The unemployment rate is higher in California because the state has lagged the rest of the nation in recovering from the recession. The latest rate hike could slow that recovery, and another increase could absolutely squelch it.

Even in parts of the country where the recovery has been robust, economic factors have combined to keep inflation low. Higher costs have been mitigated by the fact that U.S. productivity is at its greatest level in years. This means that average worker output is significantly higher now; however, wages have stagnated, thus alleviating inflationary pressures. In addition, manufacturers often have been able to get around higher commodity prices by successfully seeking out cheaper sources or materials.

Fed Chairman Alan Greenspan has said he prefers to err on the side of tightening credit too quickly rather than risk inflation by acting too late. But inflation has been under 3% for three consecutive years, the best such series in 30 years. The chairman has been notably vigilant, but he may be getting carried away. Enough is enough.

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(interest rates)

Federal funds rate, Janurary 1995: 6.0%

Discount rate, Janurary 1995: 5.25%