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Rate Hike
Federal Reserve Chairman Alan Greenspan announces that interest rates are being raised a quarter point
 
 
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Can Greenspan Do No Wrong?
   Fox Market Wire
WASHINGTON — Wall Street, Washington and the American public appear to have so much confidence in Federal Reserve Chairman Alan Greenspan that not even an interest rate hike could rattle their faith.


Dennis Cook/AP
Greenspan appears to have the trust of Washington, Wall Street and the American public

Judging from Wednesday's relatively tame reaction to the Fed's decision to raise interest rates by a quarter percentage point, it does seem Greenspan can do no wrong.

While some liberal Democratic senators did take to the Senate floor to denounce the action, they were few in number. And Thursday, the Senate voted overwhelmingly to confirm Greenspan's nomination to a fourth term.

The overwhelming majority of the Senate strongly supports Greenspan's record at the Fed, especially in light of the fact that the current expansion set a record this week as the longest in U.S. history.

"I think a strong case can be made that Alan Greenspan is the greatest central banker in the history of the world," Senate Banking Committee Chairman Phil Gramm, R-Texas, said on the Senate floor.

Despite such assurances, many consumers will feel a financial pinch from Wednesday's announcement.

That's because the Fed action to boost its federal funds rate — the interest that banks charge each other — was quickly followed by announcements from major banks around the country that they were raising their prime lending rate a similar quarter point to 8.75 percent, the highest level for this benchmark consumer and business rate since late 1995.

Wall Street, which had been worried that the central bank might feel the need to raise rates by a half-point, turned in a mixed performance Wednesday with the Dow Jones industrial average down 37.85 points at 11,003.20.

Analysts said while the Fed stopped with just a quarter-point increase, investors were clearly worried by the tone of the Fed announcement, which indicated further increases were in store.

Many economists predicted the Fed would raise rates again at the next meeting of its Federal Open Market Committee on March 21 and again at the May 16 meeting. Some analysts said the unrelenting strength of the economy could prompt a seventh quarter-point move at the June 28 meeting.

"The Fed wants to bring this high-flying economy down to a soft landing," said Richard Yamarone, an economist at Argus Research Corp. "The rate increases so far haven't really taken a toll on the economy, especially the consumer sector."

While private economists saw the economic logic behind the Fed's actions, a small band Fed critics complained that the central bank was fighting a phantom menace, given that outside of rising energy costs, inflation has remained exceptionally low despite a strong economy that has pushed unemployment to a 30-year low of 4.1 percent.

"A little nick here, a little nick there; pretty soon you're bleeding pretty badly," Sen. Tom Harkin, D-Iowa, said of the four rate increases in the past six months.

But in a speech to a group of state legislators Wednesday night, President Clinton praised Greenspan and said he helped sustain the long economic growth by not intervening too aggressively in recent years.

While traditional economic theory said the rapid growth would bring high inflation, "he had the courage to look at the evidence over the arguments of the past to see that something fundamentally different was going on in our economy," Clinton said.

In addition to boosting the federal funds rate, the Fed increased its largely symbolic discount rate, the rate the Fed charges to make direct loans to banks, by a quarter point to 5.25 percent.

In the statement announcing the Fed decisions, the policy-makers said they remained concerned that the strong economy and tight labor markets will produce rising wage demands that will not be offset by gains in productivity.

"Such trends could foster inflationary imbalances that would undermine the economy's record economic expansion," the Fed said in explaining its decision.

While productivity, the amount of output per hour of work, has shown big gains in recent years, Greenspan has expressed growing worries that the dwindling supply of available workers will eventually overwhelm these productivity increases, forcing employers to raise product prices to cover their higher wage costs.

Bruce Steinberg, chief economist at Merrill Lynch in New York, said he expected upcoming unemployment reports to be the biggest factor guiding Fed policies.

"The Fed does not want to see further declines in the unemployment rate," Steinberg said, forecasting that Friday's report will show the jobless rate dipping in January to 4 percent.

— The Associated Press contributed to this report

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