ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Wednesday, March 26, 1997 TAG: 9703260072
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: MARTIN CRUTSINGER ASSOCIATED PRESS
The central bank characterized its increase as ``a prudent step'' that would guard against higher inflation and the risk of recession.
The Federal Reserve nudged interest rates higher Tuesday for the first time in two years, hoping to stifle any threat of rising inflation. Banks immediately began raising the rates paid by millions of Americans.
Analysts suggested the Fed's quarter-point increase was not the end of the story, with two or three more boosts likely by the end of the year to slow the surprisingly strong economy.
The central bank characterized its increase as ``a prudent step'' that would guard against higher inflation and the risk of recession.
But critics were unswayed, charging that there is no inflation to pre-empt and the central bank's credit tightening actually raised the risks of recession.
``In one fell swoop, the Fed has taken money out of the pockets of every family, small business and farm in America,'' said Sen. Tom Harkin, D-Iowa, a frequent Fed critic.
The central bank said it was pushing its target for the federal funds rate, the interest that banks charge each other, up to 5.25 percent. It left its largely symbolic discount rate unchanged.
Citibank, the nation's second-largest bank, and Banc One of Ohio were the first major banks to signal increases in their prime lending rate, pushing it up a quarter-point to 8.5 percent. Other major banks, including Republic of New York and KeyCorp, followed with similar rate increases, making them effective today.
The prime is used by many banks to peg rates for credit cards, auto loans, home equity loans and adjustable-rate mortgages. In recent years, it has moved in step with changes in the Fed's funds rate.
The central bank had left the funds rate unchanged since Jan. 31, 1996, when it was cut a quarter-point to 5.25 percent. The rate had not been increased since Feb. 1, 1995, when it was pushed to 6 percent in effort to slow the economy enough to keep inflation under control.
That effort to engineer an economic ``soft landing'' worked, and the current expansion entered its seventh year this month, the third longest in U.S. history.
In its statement, the central bank said Tuesday's increase had been taken ``in light of persisting strength in demand, which is progressively increasing the risk of inflationary imbalances.''
Many economists believe economic growth could be as high as 4 percent in the current quarter, almost double the rate the central bank has been aiming for at this stage of the expansion with factories at high operating levels and unemployment at a seven-year low.
Many analysts cautioned that this rate increase will not be the last, although they were split on how many rate increases it would take to slow growth to a more acceptable level.
David Jones, economist at Aubrey G. Lanston & Co., said he was looking for two more quarter-point moves by August, at which time he said the Fed probably would be content to sit back and see whether it had done enough.
Stephen Roach of Morgan Stanley went further, saying he was looking for a full percentage point increase in the funds rate by the end of this year.
``It will take considerably higher interest rates for the Fed to achieve the results underscored in today's announcement,'' he said.
The National Association of Manufacturers, a major business lobbying organization, was sharply critical.
``It is a regrettable and serious mistake,'' said NAM vice president Paul Huard. ``It will impede economic growth and make life tougher on consumers and job-creating businesses.''
LENGTH: Medium: 73 linesby CNB