ANALYST: WILL THE FED ACT SOON?
MUNCIE, Ind. -- The U.S. economic expansion resembles a lively party in full swing, with a policeman standing quietly in the corner of the room, says a Ball State University economic analyst.
It's the Federal Reserve who is responsible for policing the economy, and with at least part of the torrid year-end growth of 1998 clearly spilling over to the new year, the time for decisive action to rein in growth seems to be drawing closer, said Patrick Barkey, director of the Bureau of Business Research.
Stepping in to raise short-term interest rates would be politically unpopular, but the Fed's independent status was purposefully crafted to give it the ability to swim against the current of popular opinion, he said.
"The ability of the U.S. economy to accelerate for so long without provoking significant inflation has won even some economic conservatives to the view that the old speed limits on economic growth no longer apply to the more technologically advanced, globally integrated economy of century's end," Barkey said. "Thus the chorus of opposition to an interest rate hike, if it occurs in the next month, may be unusually intense."
That is because signs of price inflation, at either the retail or the wholesale level, are still proving hard to find, he said.
Despite the rebound of oil prices from their low point of December of last year, retail prices, as measured by the Consumer Price Index, remain tame. In March the CPI was up by a modest two tenths of a percent over the previous months, putting the overall index up only 1.9 percent from the same month one year ago.
Barkey points out that removing energy prices from the total shaves the monthly price increase to a mere tenth of a percentage point.
"For all but the most zealous inflation hawks, this hardly seems cause for concern," he said. "But given the imperfections of the tools it has to control the economy, the Fed cannot afford to wait until renewed inflation actually shows up in the economy before taking action. Its past behavior has shown it ready and willing to clamp down on the economy when it thinks inflationary pressures are building to an unacceptable point, even when higher prices have yet to appear on store shelves."
Barkey believes there is more cause for concern because the U.S. economy is being propelled along by a consumer spending spree of considerable strength. Concern over the future seems to be missing, and spending on housing, motor vehicles and other big ticket consumer goods remains at very high levels.
Even as the rate of savings out of current income drops to the floor, the increase in the value of consumers' existing portfolios apparently is making them feel sufficiently comfortable about their positions to keep up the heady pace of spending growth.
All of this spending undoubtedly makes the policymakers at the Fed quite nervous, he said.
(NOTE TO EDITORS: For more information, contact Barkey by e-mail at [email protected] or by phone at (765) 285-5926. For more stories visit the Ball State University News Center at http://www.bsu.edu/news on the World Wide Web)
Marc Ransford 4/22/99
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