THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Thursday, November 17, 1994 TAG: 9411170009
SECTION: FRONT PAGE: A22 EDITION: FINAL
TYPE: Editorial
LENGTH: Short : 50 lines
The National Association of Manufacturers (NAM) and the AFL-CIO don't agree on much, but both say the Federal Reserve Board did the wrong thing by again boosting short-term interest rates - for the sixth time this year.
The Fed's reason for raising the cost of borrowing money is straightforward. In the Fed's view, which also is Wall Street's, U.S. economic expansion is too fast and must be retarded ``to keep inflation contained, and thereby foster sustainable economic growth.''
That sounds to many like the explanation that a U.S. military commander gave for razing a South Vietnamese village during the Vietnam War. He said it had been necessary to destroy the village in order to save it from the communists.
But the Fed is not trying to destroy the economic recovery in order to save it from inflation. It aims to keep inflation at bay without crippling the economy, which swiftly accelerating inflation would compel it to do. The news yesterday confirmed that inflation is in check.
But the Fed perceives a buildup of inflationary pressures, and it easy to understand why. By the end of 1994, the economy will have added more than 3 million jobs (compared with 2.33 million in 1993 and 1 million in 1992). The unemployment rate continues to decline, portending further increases in hourly wages. Meanwhile, the workweek is lengthening. Utilization of plant capacity is high.
We all read the same statistics. But the National Association of Manufacturers and the AFL-CIO and other critics argue that the Fed's antidote is overkill because global competition, which has pushed U.S. enterprises to trim fat and enhance worker productivity, is a powerful anti-inflationary force.
Indeed, it is. But the unexpected strength of the U.S. economic resurgence attests that the Fed's fear of inflation is not baseless. The perspective at the top of the economy is different from the view below, where higher interest rates, like inflated prices for good and services, are never welcome.
That's the situation in Hampton Roads, where - because of defense-spending cuts - economic growth lags the nation's. Nonetheless, the Fed's doing what unhappy experience suggests it is prudent to do.
KEYWORDS: INTEREST RATES
by CNB