Democrats Hit At Fed's Hike In Interest Rates
WHILE the Federal Reserve Board governors are boosting interest rates as part of their preemptive attack against inflation, political and private-sector economists are increasingly concerned that United States central bankers will stymie economic growth.
Low interest rates have been key to the recovery from recession by the US. Cheaper credit has encouraged Americans to refinance old homes, buy new ones, and purchase costly items such as washing machines and cars. Buoyed partly by renewed consumer activity and affordable capital - with the cost of borrowing at extraordinary lows during the past year - many businesses have bounced back into full production and expanded operations.
But the Clinton administration and congressional Democrats, who have proudly pointed to their ability to push down interest rates by winning the confidence of the financial market and the Fed with a federal budget deficit-reduction plan, now fear that higher interest rates will jeopardize hard-won gains of the past year.
President Clinton's chief economist has been careful not to directly criticize the Fed. But rapid economic growth in recent months has not produced faster inflation, insists Laura Tyson, chairwoman of the White House Council of Economic Advisers. Since the beginning of the year, she says, ``we have created almost a million new jobs, [and] our average hourly earnings have increased 2.6 percent over the last year, about the same as the rate of inflation.''
Agreeing with most private forecasters, Ms. Tyson says the Clinton administration ``predicts only a slight uptick in inflation as the economy continues to expand.''
The Fed's forecasters envision a more troubling scene. Anxious to limit the strength of the US economy and head off what they consider a difficult-to-reverse trend toward high-priced goods and services, US monetary authorities continue to trigger a steady increase in rates.
Capitol Hill Democrats expressed their complaints in the Congressional Joint Economic Committee 1994 economic report released last week. It dismissed inflationary fears and underscored the importance of an eased monetary policy. ``As we continue along a path of fiscal austerity and tight budgets,'' says JEC Chairman David Obey (D) of Wisconsin, ``it is critical that the recovery not be disrupted by any unnecessary rate hikes.''
Sung Won Sohn, chief economist for Minneapolis-based Norwest Corporation, a real estate and financial firm, expects the Fed to stay on alert with higher rates, increasing consumers' debt burden, dampening the economy, and exacerbating unemployment in the process.
``Home sales and buildings are among the most sensitive sectors of the economy,'' he says, and higher rates ``may weaken these sectors markedly.''
Interest-rate-sensitive sectors of the US economy, such as real estate, have performed well, as evidenced by April's 1/10th of 1 percent reduction in the nation's unemployment rate, which Secretary of Labor Robert Reich boasted ``gives us a lot to crow about.'' He claimed, ``We've gone from a jobless recovery to a jobs recovery, and now we are in a jobs expansion,'' and credited the employment boost to construction, the services industry, and manufacturing.
But National Association of Manufacturers (NAM) President Jerry Jasinowski contends that his sector remains weak, and higher rates threaten to choke off consumer activity and business borrowing. While payroll employment increased by 267,000 in April, manufacturers only added 3,000 jobs. A survey of NAM's membership reveals that large industries will continue to downsize, he says, ``and, at best, few new jobs are expected.''
According to a bimonthly poll of American firms by the US Chamber of Commerce, business confidence - an index of just how optimistic entrepreneurs are about the economy, business sales, and employment prospects over the next six months - fell for the second time in a row.
The US Chamber's chief economist, Martin Regalia, said the fall was ``fueled by a growing concern that the US economy might be cooling off over the next six months, probably because of the recent sharp increases in interest rates.'' He added that ``higher interest rates translate into higher production costs and a slowdown in the economy's appetite for goods and services.''
While there is roughly a nine-month to one-year lag on the impact of interest rate changes on the US economy, a widely followed survey of the country's top economists - the so-called Blue Chip economists - lowered their collective growth forecast for the first time this year, largely because they view higher interest rates as a brake on domestic demand. While they are not worried about inflation, according to one of the group's top economists, they do see trouble ahead for sectors such as housing that will lose ground fast if the rate hikes are too high, too fast.