- The Washington Times - Thursday, February 3, 2000

The Federal Reserve yesterday raised interest rates for the fourth time since June in an effort to keep inflation from spreading, and said more increases are likely if Americans stay on a spending binge.
Banks promised to follow up the Fed's widely expected move with boosts in their prime lending rate to 8.75 percent from 8.5 percent, ensuring that businesses and consumers will be paying higher rates on their loans, credit cards and adjustable-rate mortgages.
In a statement issued after two days of deliberations, central bankers said the risk of higher inflation now outweighs all other risks that could bring the record-long expansion to an end. Consumers and businesses have been borrowing and buying more than the economy can produce, it said, and that must change.
Financial markets seesawed in response to the Fed's quarter-point increase to 5.75 percent in its target for the federal funds rate, which is the rate that banks charge each other for overnight loans.
Many investors were relieved that the Fed did not take more aggressive action, while others noted the ominous tone of its statement promising a possibly prolonged war to subdue the inflation threat.
Alan Skrainka, chief stock market strategist for Edward Jones in St. Louis, said the Fed is worried about an "inflation bogeyman" that will never materialize, but he is confident the Fed will do its job in a way that is not disruptive to the financial markets.
"I don't think dramatic action is called for. There is no sense of urgency. Up to now, strong growth has not caused inflation to pick up," he said, predicting that the stock market will enjoy another year of double-digit gains despite the Fed's inflation-fighting crusade.
Others said stock investors are ignoring the pick-up of inflation seen in health care costs and commodity prices as well as other excesses in the economy and could be in for a rude awakening later this year when the Fed shifts into a more aggressive rate-raising mode.
Former Treasury Secretary Robert E. Rubin, who helped steer the economy through the Asian financial crisis in 1997 and 1998, said in a speech to the London School of Economics that he is "struck" by the "assumption that all will always be well" on Wall Street.
"Record trade deficits, tight labor markets, low personal savings rates, and stock valuations that are high by conventional measures are all dismissed as minor caveats to the positive outlook of the U.S. and global economies instead of being seen as possible not certain, but possible excesses and imbalances that may pose real risk to our economic well-being," he said.
"The risk is that at some point the excesses may simply become too great and the inevitable consequences follow," Mr. Rubin said.
Paul Kasriel, chief U.S. economist at Northern Trust Co. in Chicago, said the stock market, consumers and businesses eventually will all feel the crimp from the Fed's gradual rate increases.
But he worries that the Fed is not moving fast enough to address the jump in inflation pressures seen at the end of last year.
"While some people might characterize this as another pre-emptive move, in my opinion it looks as though the Fed is trying to play catch-up," he said.
Medical costs are clearly on the rise, he said, and last year's huge oil price increase is now filtering into higher prices for airline tickets, shipping and other forms of transportation.
Inexpensive imports provided a "safety valve" for the economy and a boon for consumers throughout the Asian crisis, but the crisis-induced drop in import prices dissipated last year, he said.
Now, an upturn in the world economy and import prices is starting to add to inflationary pressures, he said.
Despite heightened price pressures, the Fed for "political" reasons must be able to point to a clear upward trend in consumer prices before it can wage a fierce battle against inflation with big rate increases, he said.
The damage to consumers has not yet clearly emerged, he said, and is not likely to do so until this spring.

This story is based in part on wire service reports.

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