Economists See Growth Slowing as US Rates Rise Federal Reserve Is Expected to Tap Monetary Brakes Again to Slow Down Speeding Economy

By Ron Scherer, writer of The Christian Science Monitor | The Christian Science Monitor, January 3, 1995 | Go to article overview

Economists See Growth Slowing as US Rates Rise Federal Reserve Is Expected to Tap Monetary Brakes Again to Slow Down Speeding Economy


Ron Scherer, writer of The Christian Science Monitor, The Christian Science Monitor


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 a month.

"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 activity.

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. …

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