- The Washington Times - Wednesday, March 22, 2000

The Federal Reserve yesterday raised interest rates to their highest levels in five years and hinted at more increases to come in its campaign to slow the growth of the supercharged economy and stock market.

The Fed noted in a statement that the economy's nearly 7 percent rate of growth at the end of last year has barely slowed despite four previous quarter-point rate increases since June, and that the risk of "heightened inflation pressures" from such red-hot growth remains its primary concern.

Major banks quickly followed the Fed's quarter-point increase in two key bank lending rates with a quarter-point rise in their prime lending rate to 9 percent the highest level in five years. That ensures consumers soon will be feeling the pinch from higher rates on home equity loans, credit cards and adjustable-rate mortgages.

But while small borrowers who have gone increasingly into debt in recent months may start to feel some pain, the stock market shrugged off the Fed's widely expected move and took comfort that the central bank did not signal a quickened pace of rate increases to more aggressively attack inflation in coming months.

The Dow Jones Industrial Average soared by 227 points and rallying blue-chip stocks sent the Standard & Poor's 500 index surging by 2.6 percent to 1,494, its first record this year. The recently beleaguered Nasdaq Composite Index wiped out a 3.1 percent plunge in the morning and ended up 102 points.

Despite increasingly elevated interest rates, many analysts say the Fed will have to raise rates another two or three times in the months ahead to put a damper on today's heady growth in spending.

"We do not expect that too many consumers will cancel plans, purchases, travel, etc., because of this widely anticipated increase," said Richard Yamarone, Director of Economic Research at Argus Research Corp. in New York.

While the Fed and Chairman Alan Greenspan have frequently blamed the "wealth effect" from the soaring stock market for stoking the consumer spending binge, Mr. Yamarone said it is due more to the robust job market, which has drawn down the unemployment rate close to 4 percent and raised the incomes of even the poorest workers.

"Economic euphoria" will reign "as long as the consumer enjoys the fruits of full employment," he said. "The economic soiree will continue."

Even record-high gas prices at the pump haven't deterred the consumer spending spree, analysts note. Last month, sales of cars and sport utility vehicles hit record levels even in the wake of a headline-grabbing oil price increase.

"You would think people would stop buying big cars," said William Quan, senior economist at Aubrey G. Lanston & Co. in New York. Like the Fed, he attributes today's spending spree on cars and homes to the "tremendous wealth" created by the stock market's double-digit gains in recent years.

"This is a new economy. People today do not blink if they have to spend $7 more to fill up," he said. "Right now there's absolutely no evidence of a slowdown."

The breakneck pace of spending is particularly worrisome to the Fed in light of the oil-induced rise in prices, which is showing signs of spilling over into higher costs for transportation and housing, Mr. Quan said.

"It definitely is inflationary," he said, and the Fed will keep raising rates until a more subdued spending pattern emerges perhaps by late summer.

Despite yesterday's leap in stock prices, most indexes were making up lost ground. Broad measures of the stock market show the Fed's rate increases have been taking a toll since the beginning of the year, he said.

The Dow remains down nearly 6 percent for the year while the S&P; 500 only yesterday crossed into positive territory.

A broad market index closely watched by the Fed the Wilshire 5000 index until recently had posted losses for the year, and even with yesterday's gain of more than 2 percent is up only "modestly" in line with the Fed's goal for the stock market, Mr. Quan said.

While Wall Street took yesterday's move by the Fed in stride, Main Street businesses are increasingly riled by higher interest rates, which along with higher costs for oil and other materials are pinching their profit margins.

"If the Federal Reserve is trying to take out some insurance against inflation, this economy may end up overpaying for the premiums," said National Association of Manufacturers President Jerry Jasinowski.

"This latest move was unnecessary," he said, because inflation is stable and the slowing growth of industrial production and employment already are starting to moderate the economy's growth without the added inducement.

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