Consumers and investors had better brace themselves for another jolt from the Federal Reserve Board.
Even though the FRB already has jacked up interest rates three small notches since February, the latest word out of Washington is that the board plans yet another hike May 17 at the next meeting of its policymaking Open Market Committee.Such a move, designed to thwart inflation, would amount to overkill since the price spiral already seems to be under reasonable control, due in no small part to the previous steps of the FRB.
Consider the latest evidence just in from the economy's most persistent pulse-taker, the U.S. Department of Commerce. Its data tell analysts that the economy is behaving well and is not growing at a reckless pace.
Specifically, the gross domestic product - the total of all goods and services produced in the United States - grew at an annual rate of 2.6 percent during the first three months of 1994 compared to a torrid rate of 7 percent during the last three months of 1993. A 2.6 percent rate, or even slightly higher, is in line with long, smooth economic growth.
Even the Federal Reserve itself acknowledged this week that competitive pressures are keeping the prices of most manufactured goods in check and retail pricing is generally stable enough to attract bargain-conscious shoppers.
Despite all this, Washington insiders say the FRB is still considering a fourth small increase that would boost short-term interest rates to 4 percent compared to 3 percent in February.
Yet a sustained 1 percent increase in interest rates would increase the federal deficit by $126.5 billion over fiscal years 1995 through 1999. Financial markets reacted adversely to the previous FRB hikes and could be expected to do so again. Higher interest rates and lower stock values also hurt growth by raising financing costs to consumers and businesses.
In the current economy, fuel is comparatively cheap, unions are weak, many wage rates have been set by long-term contracts, labor is plentiful and factories are more efficient and more productive. Consequently, there is more to fear from falling employment and falling prices than from too much growth and inflation. A fourth interest rate hike could be the one that sinks the recovery. Clearly, the FRB should back off.