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Why Some Experts Oppose a Hike

November 14, 1994|From Reuters

Some economists and business executives are arguing that the Federal Reserve would be acting too hastily if it increases interest rates Tuesday.

"Any more ratcheting up of rates risks overkill," said Lawrence Chimerine, chief economist of the Economic Strategy Institute, a Washington-based think tank funded primarily by corporations and foundations. The institute sponsored a meeting this weekend, where these factors were pointed out:

* Global competition between the United States and its trading partners has helped keep a lid on prices at home.

* Technological advances through computerization have allowed manufacturers to produce more efficiently.

* Workers continue to worry about job security and are less likely to demand big wages.

* Manufacturers increasingly are successfully using temporary help to meet swings in the business cycle, meaning that manufacturers will be slow to hire full-time employees.

* The traditional yardsticks used to gauge the economy's strength--such as factory use, factory-worker overtime and industrial output--are of limited value, given the shrinking role of manufacturing and the dominant role of services.

* Data suggest the service-producing sector--which includes everything from Hollywood to health services to hotels--is operating well below full capacity. That would reduce the likelihood of a big buildup in price pressures.

"It's premature to sound the alarms of serious inflation," said Gerard Adams of the University of Pennsylvania.

This group also said the Fed must go easy when tightening credit and boosting interest rates. Monetary policy, in their view, is an inexact art at best.

"Monetary policy is a meat ax. It's not a scalpel," said Donald Hilty, a former Chrysler Corp. economist who is now a senior fellow at the Economic Strategy Institute.

"Central bankers are fighting yesterday's war," said James Robinson, former chairman of American Express Co.

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