Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, March 22, 1994 TAG: 9403220046
SECTION: BUSINESS PAGE: B7 EDITION: METRO
SOURCE: Associated Press
DATELINE: LENGTH: Medium
"Everyone and their brother believes they are going to tighten a notch," said economist Bruce Steinberg of Merrill Lynch & Co.
The Federal Open Market Committee voted at its last meeting Feb. 4 to nudge the federal funds rate up to 3.25 percent from 3 percent, the first increase in five years, in what observers saw as a move to unwind any inflationary spiral before it began.
But instead of reassuring the financial markets of its vigilance against inflation, the Fed move has sent long-term interest rates soaring and made investors skittish about the future.
Fixed-rate, 30-year mortgages, which track trends in the bond market, jumped to 7.76 percent last week, highest in more than a year. Before the Fed moved to tighten credit, mortgages were below 7 percent.
Markets grew even more anxious Friday after learning that Greenspan had canceled at the last minute an appearance in Houston to meet with the president and his top economic advisers at the White House.
The meeting, because it occurred so close to the next meeting of the open market committee, aroused suspicions that Clinton had summoned Greenspan to dissuade him from raising rates further. Clinton contends there are few signs of inflation, and further tightening is not needed.
But administration officials denied any arm-twisting was involved and described the meeting as a routine session to discuss the economy. "There were no messages given, no messages received," said Gene Sperling, a White House economics adviser.
While some economists are looking for a dramatic increase in the federal funds rate, as much as a half-percentage point, others expect Greenspan to continue to nudge rates up gradually, perhaps another quarter-percentage point.
The funds rate is what banks charge each other for overnight loans, and many analysts think a further increase would prompt banks to boost their prime lending rate. The prime rate, which affects borrowing costs for businesses and consumers, now is 6 percent.
Although most economists foresee another increase, there is less agreement on when it will occur.
"I think the Fed's got to act immediately," said Elliott Platt, an economist with Donaldson, Lufkin & Jenrette Securities Corp. in New York. "It's got to appear that it's acting in a pre-emptive fashion."
"They might wait for the employment report a week from Friday," suggested David Wyss, an economist with DRI-McGraw-Hill, a Lexington, Mass., economic forecasting firm. "But it's also possible they'll do it later this week."
There also was disagreement over whether the Fed also will raise the discount rate, which it charges banks and other financial institutions for short-term loans. The discount rate, which has been 3 percent since September 1992, has not been raised since February 1989, when it reached 7 percent.
Still, analysts say any further increase in the federal funds rate is unlikely to be the last. "History suggests that real short-term rates are more likely to have to rise than fall from here," Greenspan told Congress last month.
"In the past, Federal Reserve actions to raise interest rates have come after inflation started to rise, often too little and too late to prevent inflation from getting out of hand," said Allen Sinai, an economist with Lehman Brothers.
That eventually required much higher interest rates and then a recession to bring inflation down, he added.
This time, however, many economists think the Fed's early moves will persuade financial markets that inflation will remain below 3 percent for the third straight year and long-term interest and mortgage rates will fall by year's end.
by CNB