The Federal Reserve likely will raise rates by as much as 50 basis points by the end of August, a group of bank economists predicted Wednesday.
The American Bankers Association's economic advisory committee endorsed the rate hike, which would drive the federal funds rate near 6%.
It would act as "an insurance policy" to cool down an economy beginning to feel labor shortages and some wage pressures, said A. Lynn Reaser, chief economist for Barnett Banks Inc. of Jacksonville, Fla., and the group's chairman.
Overall, Ms. Reaser said, the group sees no storm clouds ahead. Although the economists expect growth to moderate in the second half of 1996, she said, "the economy is healthier than we've seen in many years."
Ms. Reaser did admit some concern about the recent increase in consumer delinquency rates, but she said the problem is concentrated in credit card lending. "It's not in auto and home equity loans," she said, adding that delinquencies likely were triggered by institutions "casting their nets to too wide a sphere" of consumers.
Interviewed after the meeting, ABA chief economist James A. Chessen said a Fed rate hike could exacerbate credit card delinquencies. But problems with consumer loans, he stressed, "won't materially affect" bank profits. The industry, he noted, is "extremely well reserved" for consumer loan losses.
Though he does not expect the industry to set its fifth consecutive earnings record in 1996, Mr. Chessen said that strong commercial and industrial lending will keep this year's profits close to record highs.
The economists' major concern was that shortages of both entry-level and highly skilled workers would bid up wages and be passed on in higher prices.
"We're hearing stories of bounties," being paid to attract workers, said Joel L. Naroff, the group's vice chairman and chief economist for First Union Corp. That's why the group supports a modest Fed rate hike.
If the Federal Reserve acts to curb inflationary pressures sooner rather than later, "50 basis points would be all that's required," Ms. Reaser said.
There was disagreement among the group's 10 members on the timing for a rate increase. Four economists said the Fed should act next week, whereas five members said central bankers should wait until August to see whether the economy continues to heat up.
