Economists Expect Federal Reserve to Double Its Normal Rate Increase

THE JOURNAL RECORD, May 16, 2000 | Go to article overview

Economists Expect Federal Reserve to Double Its Normal Rate Increase


WASHINGTON (AP) -- Inflation fears are likely to prompt the Federal Reserve to start moving more forcefully to raise interest rates, a growing number of economists say.

They are looking for the central bank to administer double its normal interest rate increase when Fed policy-makers meet today, boosting a key interest rate by one-half percentage point instead of the usual quarter-point.

"The Fed's view is that they really have to get serious about hiking rates," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.

The reason for the newfound urgency is a string of economic reports showing the economy is zooming ahead despite widespread predictions of a slow down.

Unemployment has fallen below 4 percent for the first time in 30 years, economic growth from January through March came in at a sizzling 5.4 percent rate and just Monday, the government reported that industrial production in April soared by 0.9 percent, the strongest advance in 20 months.

Because of all the strength, economists have been busily revising their forecasts for this year. The National Association for Business Economics now expects the gross domestic product to increase by a remarkable 4.9 percent this year, which would be the fastest growth rate so far in this nine-year expansion, the longest in U.S. history.

The recovery has managed to last so long because inflation has been dormant, allowing the central bank to let the good times roll without having to worry too much about cooling things off with higher interest rates.

But there are indications that inflation pressures are beginning to mount. A measure of wages and benefits increased in the year's first three months at the fastest pace in eight years, seemingly a confirmation of Federal Reserve Chairman Alan Greenspan's repeated worries that tight labor markets will eventually translate into inflationary wage demands.

"The free lunch we have enjoyed with inflation is clearly over," said Diane Swonk, chief economist at Bank One in Chicago. "We now have growth with a price, rising inflation and rising interest rates."

This combination of continued strong growth and the first signs of inflation are leading analysts to predict that the Fed will boost the federal funds rate, the interest that banks charge each other, by a half-point to 6. …

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