Another Fed rate increase appears likely as U.S. economy continues to grow briskly.

WASHINGTON It looks as if the Federal Reserve is going to have to crack the whip again to settle an economy that is turning out to be friskier than expected.

Economists are now saying it is a virtual certainty Fed officials will push short-term interest rates up to 5.25% from the current 4.75% this fall no Rater than the Nov. 17 meeting of the Federal Open Market Committee. And many believe more rate increases are in store. probably extending into next year.

"The economy isn't softening that much." said Leonard Santow, managing director for Griggs & Santow Inc.

William Sullivan, senior vice president for Dean Witter Reynolds Inc., said another increase of a half-percentage point in short-term rates is "baked in the cake."

The latest reminder of the economy's continuing vigor came Friday when the Fed reported that industrial production surged 0.7% in August as auto assembly plants geared up after a lull for model-year changeovers.

The gain. was bigger than expected, and it was accompanied by figures showing that the industrial sector operated at 84.7% of capacity last month, the highest reading since April 1989.

In past expansions, economists have viewed 85% as a threshold rate signaling upward price pressures. Moreover, the August report showed that producers of furniture, steel, clothing, paper, synthetic fibers, and energy were running at more than 90% of capacity.

"This tells everyone that excess capacity is all gone -- it makes holding bonds more tenuous," said Jeffery Given, .chief economist of Genetski & Associates Inc. in Chicago. The yield on the Treasury long bond soared in reaction to the Fed report, hitting a high for the year of 7.79%. The bond market was also shaken by a University of Michigan survey showmg that consumers have grown more pessimistic about inflation and expect prices to rise 3.5% next year. As recently as July, expectations were for inflation to stay below 3%.

Federal Reserve officials have made little secret of their desire to see the economy cool to about a 2.5% growth rate to keep inflation from flaring up. Fed vice chairman Alan Blinder has repeatedly told reporters in interviews that he believes the economy was getting close to this "glide path."

The view that the economy was slowing after a rapid period of growth averaging 3.5% in the first six months of the year gained currency after the Labor Department reported that the pace of job creation moderated in August while the unemployment rate held at 6.1%.

However, since then, economists have been marking up their forecasts for gross domestic product in the third quarter, and many see solid growth continuing next year as improving foreign economies step up demand for U.S. exports. The point is that while growth does appear to have moderated slightly from earlier in the year, it does not appear to be comfortably locked in the 2.5% glide path mentioned by Blinder. As a result, Fed officials are believed to be under renewed pressure to raise rates and take some steam out of the economy.

"The Fed really hasn't stomped on the brakes so far," said Richard Berner, chief economist for Mellon Bank, in Pittsburgh. "You do at this stage need outright restraint rather than a neutral monetary policy."

Berner does not rule out a Fed tightening before the end of this month, and he says he expects officials will raise short-term rates a full percentage point to 5.75% before the year is out. Other analysts do not believe the Fed will be so aggressive, but they agree rates are going up.

At the Mortgage Bankers Association, economists have revised their interest-rate outlook and now expect to see the average rate for 30-year fixed mortgages climb steadily to 9.25% from 8.75% by next July. The latest forecast, to be presented formally to members in Boston next month, is based on expectations for higher inflation and stronger economic growth. "It all adds up to several mkrd{Ged moves over the next year, not just one or two but probably three or four," said David Lereah, chief economist for the bankers group.

Rising interest rates have already taken a toll on the housing industry, slowing construction of new homes and sales. Mortgage bankers report that loan application volume in the week ending Sept. 9 was down 69% compared with a year earlier, with refinancings down 64% "Activity peaked in February. We've tailed off pretty dramatically," said Rob Rosenblatt, director of surveys at the association.

But other sectors ot the economy have continued to hold up strongly. Car sales were solid in August. despite higher rates for car loans. and consumer spending m general rebounded during the month, according to the Commerce Department. In addition. businesses continue to invest in plant and equipment at a healthy clip.

Analysts say the main drag on economic growth during the third quarter was a slowdown in the pace of inventory building by business. But inventory levels can make large swings over time, and in any case it now appears that consumer demand for goods and services is still underpruning growth.

Leonard estimated that revisions will show GDP growth in the second quarter was close to 4%. And while growth slowed in the third quarter, real final sales a measure of demand that excludes change in inventories may have been up as much as 4% to 4.5% in the third quarter, Leonard said.

Paul Kasriel, an economist with Northern Trust Co. in Chicago, expects the Fed to keep ratcheting up rates through the first half of 1995. He is looking for the federal funds rate to climb to 6% or higher and the Treasury long bond to trade n a range of 8% to 8.25%.

"We're seeing a pretty dramatic pickup in the European economies. I think that's a negative for global inflation and interest rates," Kasriel said Lereah agreed, saying he believes that a rebound in global growth that spurs demand for U.S. exports could add as much as 1% to 1.5% onto GDP growth.

Long-term interest rates are likely to stay high even as growth moderates toward the 2.5% targeted by Fed officials because global demand for credit is strengthening, said Raymond Worsek. chief economist for A.G. Edwards & Sons in St. Louis.

"We can still have a relatively high level of long-term interest rates in this country compared to what we've had in the past three or four years without that signaling a sharp rise m inflation," Worsek said.

Dean Patterson contributed to this article.

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