Policy Decisions Await Fed at Mid-Year Meeting: Analysts Are Divided ...
As they approach a key mid-year policy-making meeting this month, several Federal Reserve officials have indicated that there are distinct limits to how much money tliey are willing to pump into the economy. If that is not enough to keep interest rates from rising, then so be it.</br></br>ÛÏWe are supplying enough money and credit to finance a sustainable rate of economic expansion, and we intend to continue doing so,Û Fed Gov. Lyle E. Gramley declared recently. "But we do not intend to waste the substantial gains in the battle against inflation that have been won at such enormous cost during the past few years.Û</br></br>A few days later, Chairman Paul A. Volcker told a Senate subcommittee, ÛÏOur recovery has been proceeding rapidly, with little acceleration of inflation. But the combined credit demands of the federal government and the private sector have generated disturbing pressures on interest rates, on developing countries and on exchange rates.</br></br>"In concept, we can visualize an economic expansion characterized by relatively high interest rates and by strong private consumption and a large budget deficit,Û Volcker continued. ÛÏThat is what we are having. But it has costsÛÓ-costs reflected in huge trade deficits and net borrowing from abroad, potential problems for housing and other interest-sensitive sectors, and risks of exchange rate and financial instability!Û</br></br>Last week, when major banks raised their prime lending rate from 12Vi percent to 13 percent, the White House rejected Volcker's . logic while trying once again to protect the president from any fallout for rising interest rates. However, this time presidential spokesman Larry Speakes blamed the higher rates on the nationÛªs banks rather than the Fed, which had felt the administrationÛªs anger during a brief confrontational episode in May.