Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, August 16, 1994 TAG: 9408160104
SECTION: BUSINESS PAGE: C-8 EDITION: METRO
SOURCE: Associated Press WASHINGTON
DATELINE: LENGTH: Medium
``It gives the Fed ... a little nudge'' a day before Tuesday's today's policy meeting, said economist Laurence H. Meyer, a St. Louis consultant.
The Fed's industrial production index rose a modest 0.2 percent in July, following a robust 0.5 percent gain the month before. The gain was stronger than predicted and would have been twice as large if not for a decline in electricity generation from an unusually high level in June and a strike at heavy equipment manufacturer Caterpillar Inc.
Meyer and other analysts expect the central bank's policy-setting Federal Open Market Committee, which meets today, to see the report as adding to the justification for the fifth increase in short-term interest rates this year.
Between February and May, the committee raised the rate banks charge each other for overnight loans from 3 percent to 4.25 percent. It probably will increase the rate by at least a quarter of a percentage point, and perhaps by half a point, at today's meeting, analysts said.
``The Fed is determined to demonstrate its zeal as an inflation fighter,'' said economist Sandra Shaber of the WEFA Group in Bala Cynwyd, Pa.
She anticipated the rate increase even though inflation appears under control. Through July, consumer prices rose at a rate that, if continued, would match last year's 2.7 percent.
But the Fed, analysts said, is trying to keep the economy from overheating before inflation starts to accelerate. In so doing, it hopes to restrain the rise in long-term interest rates, such as mortgage rates, which are set in financial markets rather than by the Fed directly.
Democrats in Congress are protesting the expected increase in short-term rates.
``I hope the Federal Reserve will not consider it appropriate to destroy employment opportunities and hold wages down, just when it looks as if ... workers may begin to make some gains,'' House Budget Committee Chairman Martin Olav Sabo, D-Minn., told Federal Reserve Chairman Alan Greenspan in a letter Monday.
The Clinton administration, meanwhile, signaled a hands-off policy, saying the Fed was an independent agency and would act as it deemed appropriate.
Although White House press secretary Dee Dee Myers said the administration doesn't see inflationary pressures building, Treasury Department spokeswoman Joan Logue-Kinder said Secretary Lloyd Bentsen's recent statement that a rate increase was not needed was outdated. Economic reports for July show strong employment gains and a big increase in prices paid to wholesalers.
In trying to determine how much inflationary pressure is building in the economy, the Fed looks for signs that labor shortages are developing and for whether factories are reaching the limit of their ability to produce enough goods to fulfill anticipated demand.
Industrial plants in July operated at 83.9 percent of capacity, the same as in June but up from 81.3 percent a year earlier and only nine-tenths of a percentage point below the pre-recession peak reached in 1989.
by CNB