Fed Under Fire From All Sides on Expected Hike


The Federal Reserve is attracting an unusual coalition of critics as it prepares to nudge up interest rates, probably today. The attacks represent a backhanded tribute to the central bank’s widely recognized role as exclusive manager of America’s long economic boom.

Critics from both the left and right are lambasting the expected rate hike as bad news for everybody from welfare mothers to manufacturing firms. In the process, they are acknowledging a key change in the economic landscape of the 1990s.

“The Fed’s the only game left in town,” said former Labor Secretary Robert Reich, now a professor at Brandeis University.

The central bank’s policymaking body, the Federal Open Market Committee, is expected to announce today that it is lifting the so-called federal funds rate--the rate at which banks make overnight loans to one another--from 4.75% to 5%.


The increase is aimed at slowing the economy from its feverish 4% growth rate to 3% in order to protect against the revival of inflation. But most analysts think that the action will barely be felt because market interest rates, anticipating the move, have already risen.

An increase in the Fed funds rate would be the first since March 1997.

Reich and other liberals are lining up with business spokespersons such as Jerry Jasinowski, president of the National Assn. of Manufacturers, and conservative populists such as author and commentator Kevin Phillips in attacking the rate hike prospectively. They portray the central bank as anti-democratic, in the thrall of big banks and investment houses.

“The Federal Reserve is the kingpin of the global bailout arsenal,” Phillips charged. Fed Chairman Alan Greenspan “talks about what a bad thing it is that workers get raises, but is willing to bail out rich institutions full of high-paid executives.”


Harsh words are hardly new for the Fed. But now they are coming in the midst of a near-record boom, which the central bank is widely credited with having helped orchestrate, and on the eve of what is expected to be only a modest rate increase.

One reason for all the attention is the timing of the increase. The economy is in its fourth year of 4%-plus growth with unemployment hovering close to a three-decade low.

On Tuesday, the Conference Board reported that consumer confidence in the U.S. economy rose in June to its highest level in more than three decades, as Americans show few signs of ending a spending spree tied to plentiful jobs and a rising stock market. It was the eighth straight monthly increase, a record unmatched since 1971-72.

But there are few signs that inflation has reignited and any rate increase would be preemptive, aimed at stopping a general price increase before it starts.


“We object to the idea of a preemptive strike. There is no need for it,” said U.S. Rep. Maxine Waters (D-Los Angeles), a member of the House Banking Committee. “We think the economy is doing well and we should appreciate what we have and let it keep going.”

“They acknowledge there is no significant evidence of inflation. There is no evidence we’re reaching an unsustainable level of growth,” said Rep. Barney Frank (D-Mass.), another committee member.

Waters and Frank joined AFL-CIO President John J. Sweeney, NAACP President Kweisi Mfume and representatives of Latino and women’s groups last week in protesting the anticipated rate hike. Jasinowski, the manufacturing trade group president, said he had planned to join the protest but had a scheduling conflict.

Beyond timing, analysts said that the other and more important reason that Fed actions are coming in for such critical attention is that they are quickly becoming the only targets available for those concerned about a wide range of economic and social issues.


“Since we’ve had a balanced-budget law, there is no fiscal policy,” said Reich, the former Labor secretary. “Without welfare, the only poverty program we have is employment.”

And with Washington spending less on defense, farm price supports and infrastructure, he added, fewer and fewer Americans depend on government decisions.

“The government policies that most directly affect the most Americans are the ones that work through their mortgages and car loans and credit cards, and those are the Fed’s,” Reich said.

Reich and other critics note that the nation’s long expansion has finally begun to benefit lower-income Americans. It has reduced unemployment in traditionally disadvantaged black and Latino communities to their lowest levels on record.


The critics say the Fed, if it raises rates now, would renege on an implicit promise to the poor that, in return for shrinking the social safety net and reducing job security, it would not try to slow economic growth.

Frank said, “What you’re telling working people is that you’re going to get the bad part of economic change, but not the good part.”


Consumer Confidence


From a monthly survey of 5,000 U.S. households. Index: 1985=100.

June: 138.4

Source: Conference Board