Fed Has Overdone It, Some Economists Say

BANK economist Lacy Hunt calls the Federal Reserve's move Tuesday to boost interest rates by the largest amount since 1981 ``a gamble.''

H. Erich Heinemann, a brokerage house economist, holds that the Fed has shifted into ``overkill territory.''

The chief economist for the National Association of Manufacturers, Gordon Richards, says the action was ``not necessary.''

And, Wall Street economist Robert H. Parks foresees - as soon as early 1995 - either a recession or a ``growth recession,'' that is, only a modest increase in real output.

Of course, one could pick another four economists who might laud the Fed's hike of 0.75 percent in short-term rates as a wise measure necessary to prevent economic overheating and accelerating inflation. However, most economists would probably agree that the Fed's move was bold and risky. Here's why:

* Monetary policy changes affect business activity with a lag.

Mr. Hunt, chief economist of HSBC Securities Inc., figures that after the Fed has tightened monetary policy about half of its total slowing impact on the economy occurs in the first six to nine months, the remainder in succeeding months. So the restraint of the Fed's five previous interest rate hikes since February has yet to be fully felt.

After subtracting inflation, the current real interest rate of about 5.3 percent is two percentage points above the average real rate since 1953. That high a level, notes Hunt, has been ``historically associated with a recession.''

By the calculation of Mr. Heinemann, chief economist with Ladenburg, Thalmann & Co., the Fed's current tough policy will produce a recession in 1996. But that view of such a long lag between monetary policy change and its effect on the economy is unusual among economists.

* Growth in commercial bank reserves and the nation's money supply has been stagnant for some 10 months. Velocity (how fast money turns over) has increased sufficiently to permit solid growth in sales so far. But Mr. Parks, a Pace University professor who also advises some 40 major financial institutions, expects that velocity pattern to reverse, slowing down the economy.

``The Fed has repeatedly and chronically over-constricted to produce recession in the name of combatting inflation,'' he says. He blames the Fed for the last nine recessions and claims to have forecast ``six of the last five recessions.'' After the 1987 stock market crash, he warned of a slump that didn't occur.

* Inflation has not yet accelerated. So far this year, the consumer price index has risen at an annual rate of 2.6 percent, slightly better than last year's 2.7 percent rate. The producer price index has fallen for the past two months, the largest back-to-back decline since 1986. The broad deflator for the entire economy rose at only 1.8 percent in the third quarter.

``Under these circumstances the Federal Reserve is overreacting,'' says Mr. Richards. He adds that a combination of good productivity gains and low wage increases have kept labor costs down for business. With all the layoffs and the wider use of part-time or temporary workers, employees are concerned about job security and ``extremely docile'' in seeking wage hikes, he says.

Further, rather than pass on extra costs in the form of higher prices, industrialists have in the past few years learned better how to ``engineer'' such new costs out of the system.

* Statistics on the economy are ``contradictory,'' many indicating continued rapid growth, others showing a downturn.

For example, retail sales surged 1.1 percent in October. But an early survey of retailers by Johnson's Red Book shows sales down 2.7 percent in the first half of November.

* Some economists challenge the assumption by many Fed officials that when unemployment drops below about 6 percent, it will result in accelerating wages and inflation. (In October, 5.8 percent of the civilian work force was jobless.) Richards estimates inflation starts to accelerate below 5.4 percent unemployment, but others say that it isn't a valid economic concept at all. Hunt says inflation results when the economy has been fed too much money, and that isn't a problem now.

``There is nothing wrong with economic growth,'' Hunt says.

The Fed hopes for a ``soft landing'' - real growth falling to about a 2.5 percent rate - and not a downturn in national output.