The Federal Reserve's decision Tuesday not to push up short-term interest rates improves the odds the economy will remain healthy well into 1996, economists say.
An upward push on rates "would have raised the risk of recession in 1996," says Lynn Reaser, chief economist at First Interstate Bank. The Fed is "recognizing the fact that the lag between what it does now and the effects from those actions are long and potentially dangerous."
Since February, the Fed has pushed up short rates six times - for a total 2 1/2 percentage points. Its aim: Keep inflation low by cooling a strong economy. The Fed's last move came Nov. 15, when it pushed the key federal funds rate - what banks charge each other for overnight loans - to 5 1/2% from 4 3/4%. That was the largest single increase since 1981. Long-term interest rates have risen as well. A year ago, 30-year fixed-rate mortgages averaged 7.17%. They now average 9.25%.
Because the economy has remained quite strong, some Fed watchers thought the central bank would boost rates again Tuesday when Chairman Alan Greenspan and other Fed policymakers met in Washington. But at the close of their four-hour meeting, Fed policymakers made clear they had decided to do nothing. A terse statement said the meeting had ended and that "we have no further announcements."
The reason Fed policymakers held off: They don't want to raise rates too high and too fast. That could end up doing more damage than good in a year or so, says David Jones, chief economist at bond brokers Aubrey G. Lanston. Rapid, sharp rate hikes on top of the earlier ones could cool borrowing and spending enough to slow the economy to a crawl - or recession.
"Greenspan (and the Fed) are trying to strike a delicate balance," Jones says, "between tightening enough to give us a gentle downward glide and not tightening so much that they tip the economy over."
The Fed's likely next move, economists say, will be an upward push on short rates around the time of its next policymaking meeting: a two-day session, Jan. 31-Feb. 1.
By then, economists say, the Fed should have enough fresh data on the economy to know if it is strong enough to withstand another quarter- or half-point increase in short rates. And if the Fed nudges rates higher as added insurance against a pick-up in inflation, that would probably be the last increase this economic cycle.
