Fed Is Seen Keeping Tight-Credit Policy Despite New Evidence of Low Inflation
NEW YORK -- Despite additional evidence of low inflation, Federal Reserve System officials still fear that the economy is growing too rapidly and that inflation could surge by early next year.</br></br>As a result, the Fed, whose policy-making arm meets today and tomorrow, probably will try to keep short-term interest rates in the next few weeks close to their current lofty levels, or slightly higher, according to bankers, economists and sources close to the Fed.</br></br>Some congressional critics contend that such a policy could lead to economic disaster. Rep. Jack Kemp (R., N.Y.) argues that the Fed's credit policy already is much too tight and has intensified international financial strains. He also insists that Wall Street fears about inflation are wildly exaggerated, especially in view of continued continued declines in commodity prices as well as a government report Friday showing the producer price index remained unchanged in June for the third consecutive month.</br></br>Nevertheless, many analysts predict that the Fed this week will decide to keep a firm grip on credit conditions, and possibly even tighten its clamp slightly, in an effort to cool off the economy and keep inflation subdued. "If the Fed wants to make sure that inflation isn't going to worsen, then it must slow the growth of the economy," says Robert G. Dederick, executive vice president of Northern Trust Co. in Chicago. Mr. Dederick, who was a Commerce undersecretary for economic affairs in the Reagan administration, adds: "I still think it's likely that the Fed will tighten slightly further."</br></br>Some analysts insist that the Fed committee won't make any change in credit conditions at this week's meeting. They argue that the economy already is slowing enough on its own and that any additional credit-tightening moves by the Fed would represent overkill. Also, they point out that two of the three money-supply measures that the Fed monitors remain within its targets for this year.