Can the Federal Reserve slow this country's economic juggernaut? Chairman Alan Greenspan and his colleagues are trying mightily -- and yet growth continues to surge. Tuesday's three-quarter-point hikes in federal funds and in the discount rate were aimed at sending the strongest message yet that the Fed is serious about muting this boom before it reignites inflation.
The Fed wants to keep the nation rolling along at a 2.5 percengrowth rate, not the 4.3 percent rate of the last four quarters. DTC Warning signs abound that this economy could be overheating:
A dropping jobless rate (5.8 percent) indicates that the economy may be close to what economists consider full employment. Factory output reached 84.9 percent of capacity in October -- nearing a point at which bottlenecks could start to develop, the ++ price of raw materials could surge and demands for higher wages could proliferate. And retail sales last month boomed, up 1.1 percent, led by insatiable demand for new cars and trucks.
Will the Fed's latest move cool things off? Not in time for the crucial winter holiday sales season. Still, higher interest rates are on the way, making auto loans, credit card payments, home equity loans and even mortgages more costly. The higher rates could also slow the pace of new loans by banks now eager to lend money to businesses.
Chairman Greenspan is trying to keep a lid on inflation, even if it hurts consumers and businesses in the short term. Slowing the economy's growth to a more manageable level is the goal. Better have a long and gradual upswing than a roller-coaster ride with a steep uptick and an even steeper plunge.
And yet some economists are now beginning to wonder if the Fed is misreading the economy. Could the nation absorb a higher growth rate without triggering inflation? The National Association of Manufacturers thinks so. Presidential adviser Laura D'Andrea Tyson made the intriguing observation that heavy investment in recent years in computers and high-efficiency machinery may have enlarged the nation's productive capacity. "If that is true," she said, "then maybe we are underestimating the economy's potential."
That's the current battleground. But don't look for the Fed to back away from its overall inflation-fighting policy. More rate hikes seem likely early next year if the appetite for new cars, furniture, appliances and homes doesn't moderate. As long as the White House remains at least quietly supportive of the Fed's preemptive strikes on inflation, Mr. Greenspan's approach seems secure.