ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Tuesday, September 24, 1996 TAG: 9609240058
SECTION: BUSINESS PAGE: B-8 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: Associated Press
SOME FINANCIAL EXPERTS consider the small increase a likely compromise between regional bank presidents who want to slow the economy and the Fed's seven board members who have been following a wait-and-see approach.
On the eve of a meeting of the Federal Reserve, many economists said they believe the central bank will launch a pre-emptive strike against inflation, raising interest rates today for the first time in nearly two years.
However, private economists conceded that the issue remains a close call that likely will provoke lengthy discussion when the Federal Open Market Committee meets for its final session before the November elections.
``I think there is a deeper division within the Fed than we have seen in a long time,'' said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.
The central bank is split between one camp that has argued for no change in policy this close to the November elections and another group worried that sizzling economic growth and unemployment at a seven-year low demand a tightening of credit conditions to ward off higher inflation.
Some inflation hawks have been urging a dramatic half-point increase in Fed interest rates.
The FOMC is composed of the Fed's seven Washington board members, who generally have been supporting a wait-and-see approach advocated by Fed Chairman Alan Greenspan, and the 12 regional bank presidents, many of whom have been urging a tougher stance against inflation.
That split was underscored by a detailed leak last week that eight of the 12 Fed regional banks were in favor of an increase in the Fed's discount rate, with three of the banks seeking a half-point increase.
The Fed has refused comment on the leak but it was reported Monday that the FBI has been called in to investigate.
Some economists said the central bank may decide today to split the difference.
``A quarter-point rate hike might be the compromise reached between those who want to do more and those who want to do nothing,'' said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.
``The odds now favor a quarter-point tightening given the leaks and the economic numbers that have come in during the past week,'' said David Wyss, chief financial economist at DRI-McGraw Hill Inc. in Lexington, Mass.
Wyss said he believed the central bank would increase both its target for the federal funds rate - the interest that banks charge each other on overnight loans - and for the discount rate - the interest the Fed charges for direct loans to banks. Such short-term loans are common among banks, which must balance their books at the end of each business day.
Changes in such rates generally are passed immediately to banks' commercial customers in the form of increases in the prime rate and to consumers in terms of higher rates for a variety of loans tied to the prime.
The federal funds rate is 5.25 percent and the discount rate is 5 percent. An increase in the funds rate would trigger an immediate increase in commercial banks' prime lending rate. The prime, the benchmark for millions of business and consumer loans, is 8.25 percent.
David Seiders, chief economist at the National Association of Home Builders, argued that the rate increase was unnecessary and could have a negative effect on the housing industry.
``We think there is an economic slowdown already in progress without Fed tightening,'' Seiders said.
He said the 4.8 percent rate of increase in the overall economy in the second quarter has likely slowed to a much more moderate 2.5 percent advance this quarter as rising long-term interest rates have slowed growth.
The National Association of Manufacturers said Monday that a survey showed 83 percent of its board opposes a Fed rate increase.
``In the current economic climate, low unemployment has not translated into more inflationary pressure,'' said the association's president, Jerry Jasinowski. ``Under these circumstances there is no need for monetary tightening. Why mess with success?''
The last time the Fed switched course and began raising interest rates, in February 1994, it triggered a one-day drop of 96 points in the Dow Jones industrial average on Wall Street.
Analysts said they did not expect that severe a reaction this time. They noted that the benchmark 30-year Treasury bond already has increased by a full percentage point since the beginning of the year in anticipation of a Fed rate increase.
``There is a very different environment now than in 1994. People are prepared for a rate hike, and there isn't as much of a speculative environment built into the markets,'' Jones said.
The February 1994 rate change was the first in a series of seven rate increases ending in February 1995 that doubled the funds rate from 3 percent to 6 percent. Then in July of last year, the Fed began a series of three rate cuts that brought the funds rate down to 5.25 percent on Jan. 31, where it is now.
LENGTH: Medium: 92 linesby CNB