Newspaper article The Christian Science Monitor

Recession Risk Rises with Fed Tightening

Newspaper article The Christian Science Monitor

Recession Risk Rises with Fed Tightening

Article excerpt

ECONOMISTS are already talking about the next slump.

"Recession risks for later this year and in 1995, although low, must be deemed higher now because of the higher interest rates and equity market corrections," Allen Sinai, an economist at Lehman Brothers, a New York investment banking firm, notes in a report for institutional investors.

The Federal Reserve has increased short-term interest rates one-half of a percentage point since early February, prompting a jump in long-term rates and a drop in stock prices. Many market analysts wonder if the Fed's policymaking Open Market Committee will tighten monetary policy further at its next meeting on May 17.

"The next two years represents a particularly vulnerable period as the Federal Reserve and the Clinton administration try to achieve a tricky downshifting through the growth gears," write Roger Brinner and David Wyss, economists with DRI/McGraw-Hill, a Lexington, Mass., consulting firm. "We accelerated to fifth gear - 5 percent plus real GDP {gross domestic product} gains - unexpectedly and unintentionally, and now must work down toward a sustainable second or third gear without accidentally shifting into reverse."

Leonard Lempert, director of Statistical Indicator Associates, in North Egremont, Mass., after listing economic indicators that usually decline before a recession, maintains that there is still time for a downturn "before year-end 1994."

Most economists do not anticipate a recession this year. The April survey of 50 forecasters by Blue Chip Economic Indicators finds them on average predicting 3.7 percent real growth this year, up from 3.3 percent two months ago.

Tighter monetary policy, with its risks for the economy at a time when unemployment stands at 6.5 percent of the labor force, has AFL-CIO economist Markley Roberts steaming. "The concerns, interest, and welfare of ordinary people are not the primary concerns of Fed policymakers," he says. "They are much more concerned with bank profits. I wish I had enough demagogic words to express my feelings about the Fed."

Fed officials maintain that their policy shift is intended to preempt any rise in inflation. …

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