Magazine article Newsweek

Too Much Good News: Why the Fed Is Poised to Raise Interest Rates

Magazine article Newsweek

Too Much Good News: Why the Fed Is Poised to Raise Interest Rates

Article excerpt

Why the Fed is poised to raise interest rates

IF CENTRAL BANKERS EVER CRACKED A smile, this would be the time. The Federal Reserve Board has come close to perfection. The economy is strong, yet inflation is below S percent for the third year running. Which gives this year's presidential campaign a most unexpected twist. The Fed, against tradition, seems poised to hike interest rates just six weeks before voters choose between Bill Clinton and Bob Dole.

Call it a case of too much good news. The U.S. jobless rate dropped to 5.1 percent in August, the Labor Department announced Friday. The average hourly wage jumped six cents to $11.87, a striking 6 percent increase at an annual rate. Those reports, coupled with signs that retail sales are on the upswing, are just enough to feed worry that consumer prices will soon start to creep up. There's not much indication of that yet. But when its rate-setting committee meets later this month, the Fed is likely to make short-term borrowing more costly. The goal now, as when the Fed began its last series of interest-rate hikes in 1994, is to tap the brakes early to avoid having to slam them on later in the face of higher inflation. "They were pretty proud of what they did in '94," says economist Robert Dederick of Northern Trust in Chicago. "That's what they want to do again."

Election years are normally a time for the Fed to seek cover. If it raises interest rates, it stands accused of sabotaging the party in power. …

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