Fed Says Booming Economy Needed Rate Hike

Federal Reserve policymakers Wednesday defended their decision to raise short-term interest rates in March, telling a congressional committee that the economy was growing at an unsustainable pace at that time.

"The policy action was clearly a preemptive one, not based on inflation pressures evident at the time, but on inflation pressures likely to emerge in the absence of policy action," Fed Governor Laurence H. Meyer told the House Banking Committee.

Federal Reserve Bank of New York President William J. McDonough said that allowing the economy to grow uncontrollably would eventually result in a severe recession. Rather than subject the public to these boom-bust cycles, the Fed is aiming for steady growth, he said.

Earlier in the hearing, several lawmakers criticized the rate increase. "There are people on the Federal Reserve Board who are resistant to good news," said Rep. Barney Frank, D-Mass.

"For the people on the top, the economy has been performing exceptionally," said Rep. Bernard Sander, I-Vt., "but what about the tens of millions of working-class families?"

Private-sector economists were divided over the need for further rate increases. William A. Brown, chief economist at J.P. Morgan & Co., testified that the Fed should apply the brakes. "What is needed now is not another cheerleader, but a timely dose of restraint," he said.

But John Lipsky, chief economist at Chase Manhattan Corp., said the Fed should leave rates alone. "Unless more convincing evidence emerges of growing inflationary pressures," the Federal Open Market Committee "can leave policy unchanged," he said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER