ECONOMISTS expect the Federal Reserve to shove interest rates
onto the "up" escalator Wednesday. They aren't so sure, however, if
this is the top floor for rates, or if they will go higher again in
"The Fed can't be seen as inactive," says Lyle Gramley, a former
Fed governor and a consulting economist for Mortgage Bankers
Association in Washington.
Most forecasters anticipate a rise in short-term rates of 0.5
percent this week. This increase, like the other six interest-rate
hikes since last February, is designed to slow down economic
On Friday, the government reported the economy was in high gear
in the last three months of 1994. The Gross Domestic Product, the
output of the nation's goods and services, grew at a real 4.5
percent rate, up from 4 percent in the third quarter.
The GDP numbers indicated that a significant part of the
nation's output ended up in warehouses or on retailers' shelves as
inventory. "That rate of inventory investment cannot continue
indefinitely," warns Mr. Gramley.
The rise in inventories prompted some economists to predict the
economy had finally started to respond to prior interest-rate
increases. "There are signs the economy is starting to be not as
strong as anticipated," says A. Gary Shilling, who runs his own
economic consulting firm in Springfield, N.J.
Mr. Shilling points to a slowing in sales of consumer durables,
such as automobile sales. "Consumer durables usually peak about one
to seven quarters ahead of the economy and it looks like a peaking
out," he predicts.
Last week, Fed chairman, Alan Greenspan, in testimony before
Congress, indicated that he too saw signs of a slowing economy. Mr.
Greenspan also hinted at a rate increase since he also said he was
distressed by some signs of inflation.
Gary Shoesmith, a professor at Wake Forest University's Babcock
School of Management in North Carolina, warns against interpreting
the inventory statistics as a forerunner of a downturn. "Inventory
is at historic lows and we are simply restocking," he explains. He
predicts companies will continue to build inventory over the next
two quarters, "keeping the GDP persistently strong for the first
half of the year."
But Susan Jacobs, who runs her own consulting firm in New
Jersey, says the auto industry now has "excessive" inventories in
subcompacts and minivans. Nonetheless, she is not convinced that
the inventory rise indicates car sales have peaked. "The companies
may have just offered less incentives," she explains.
Economists predict that at some point this year consumer
spending will start to tail off. …