Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, December 21, 1993 TAG: 9312210056
SECTION: BUSINESS PAGE: B-6 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
As economic growth accelerates, more and more analysts are speculating that the central bank will move sometime during the first three months of the new year.
They think Fed policymakers, scheduled to meet behind closed doors today, probably will vote to adopt a policy bias favoring higher rates. But the actual increase probably will not come until later.
"The debate here is whether the Fed should move to stave off inflation before inflationary pressures build or actually wait until inflation appears in the numbers," said economist Louis Crandall of R.H. Wrightson & Co.
Clinton administration officials, with an eye on the 1994 congressional elections, want any rate increase to come later rather than sooner, after the first quarter at least.
"The administration is saying, `Don't tighten yet. Make sure this recovery is for real. There's no imminent sign of inflation. Don't take away the punch bowl until the party gets started,' " said economist David Wyss of DRI-McGraw Hill, a forecasting firm based in Lexington, Mass.
Treasury Secretary Lloyd Bentsen, in an interview Monday, said current inflation does not justify any interest-rate increase now. The administration expects inflation of about 3 percent next year, roughly the same as this year and last.
"If you're talking about a preemptive strike before any inflation is evident, then I'm not for that, period," Bentsen said.
Still, he conceded that the Fed's key short-term interest rate, at 3 percent since September 1992, cannot remain at that level forever.
"We ourselves have predicted that, obviously, over the next three years, you're going to see some modest increase in short-term rates," Bentsen said. "You cannot long sustain a situation where the real rate is zero."
The administration's forecast calls for an increase in the benchmark federal funds rate, the rate banks charge each other on overnight loans, of half a percentage point. But some economists are predicting it could be as high as 4.5 percent by year's end.
Bolstering the case for a tighter monetary policy is the fact that economic growth in this quarter is likely to hit 4 percent or higher, the best of the year.
The increased activity has meant the nation's industrial companies are operating at a higher rate. Between August and November, their use of operating capacity jumped from 81.7 percent to 83 percent. That's nearing the 85 percent level that economists say poses the danger of inflationary production bottlenecks.
Also the unemployment rate in November sank to a three-year low of 6.4 percent, compared with 7 percent only five months earlier. If the rate continues falling, workers and unions will become more persistent about demanding wage increases, economists think.
Arguing against a monetary tightening, however, is the expectation that economic growth will slow in the first quarter of next year.
Bentsen said growth likely will spurt to between 4 percent and 5 percent in the current quarter but then subside to a moderate 3 percent or a little better in the first three months of 1994.
"The fourth quarter is a bit of an aberration. I do not expect it to be sustained," Bentsen said. "What you're seeing is some deferred activity from the floods, and you're seeing an extraordinary increase in the sales of automobiles and trucks. But I would anticipate that the first quarter of next year would get back to a more sustainable level."
And many analysts say the precipitous drop in world oil prices since mid-October should help tame inflation, during the early months of 1994, at least.
by CNB