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Despite Opposition, the Fed Is Expected to Increase Rates for 6th Time This Year : Interest: Some on Wall Street say a hike is needed to slow the economy. Critics argue that it could put the country into a recession.

November 14, 1994|From Associated Press

WASHINGTON — The Federal Reserve Board, expected to increase interest rates for a sixth time Tuesday, faces growing opposition from critics who contend its policies threaten to topple the country into a recession.

Nonetheless, there is a widespread belief that the central bank will raise interest rates for a sixth time this year when its policy-setting group, the Federal Open Market Committee, meets Tuesday.

"The big surprise would be if they did not," said Mellon Bank Corp. economist Richard Berner. Most observers expect the Fed to raise short-term interest rates a half point after having raised rates 1.75 percentage points since early February.

Those on Wall Street argue the rate hike is needed to slow the economy--which grew at a 3.4% annual rate last quarter--to a less inflationary pace.

"Inflation risks are rising, and we see increasingly clear evidence that price pressures are growing in the early stages of the production pipeline," said Berner.

But recent data suggest inflation, while gathering steam in the earlier stages of production, is not about to flare up at the consumer level.

Wholesale prices slid 0.5% in October for a second straight month. Consumer prices have risen at a 2.8% annual rate in the first nine months of the year, barely exceeding the 2.7% rise in all of 1993.

And the productivity of U.S. businesses rebounded in the third quarter, reflecting a pickup in the output of goods, slower growth in work hours and a puny rise in labor costs.

The Fed's inflation-fighting efforts received some words of support Friday from Rep. Newt Gingrich, the Republican in line to become House speaker in January.

Gingrich said he supported the goal of stable money growth, something long espoused by conservative economists known as monetarists.

"I'm prepared to argue that part of the long-term change we're going through (with the Republican take-over of Congress) ought to be to have a very severe effort to move towards a very stable money environment," Gingrich said at an investors' conference.

He said the 1946 law under which the Fed operates should be amended to specifically "make stable money a major goal of the Fed and to say that we want you, in fact, to have a non-inflationary environment."

Federal Reserve Chairman Alan Greenspan and other inflation hawks on the Fed have talked about setting zero-inflation as a Fed goal, but this view has been heavily criticized by liberal Democrats in Congress. They accuse Greenspan and his colleagues of being overly worried about inflation at the expense of economic growth and jobs.

Gingrich called unwarranted fears that Republican tax-cut promises will inflate the deficit and prompt the Fed to raise interest rates much further to combat growing inflationary pressures caused by government red ink.

Fed officials should invite Gingrich and Senate Republican leader Bob Dole to meet with them so that the two can explain what a Republican-led Congress will do, Gingrich said.

The Fed could "see whether or not we're serious about actually getting to a lower deficit."

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