The nation's economy finished the year at a gallop, leaving the Federal Reserve's monetary policymakers with a formidable decision to make about interest rates when they meet Tuesday.
"I think the Fed is getting nervous. We could be due for a speeding ticket," said Robert A. Brusca, chief economist at Nikko Securities, New York. He expects a rate hike within two months and would not be surprised if it happened this week.
Economists were jolted Friday when the Commerce Department reported that the economy expanded at a swift 4.7% annual rate during the fourth quarter. That was significantly above the 3.9% consensus expectation for the gross domestic product.
Certainly, the argument for the Fed to apply the brakes is not clear- cut. Data for January, and some from December, show the economy decelerating to a more moderate rate. Meanwhile, evidence of inflation remains largely absent.
But can the economy continue to run this well? Some Wall Street economists say it can, at least this year.
"We expect 1997 GDP growth to be in the 2% to 2.5% range, around what the Fed considers the economy's noninflationary growth potential to be," said Bruce Steinberg, manager of macroeconomic research at Merrill Lynch & Co.
Mr. Steinberg asserted that the fourth-quarter spurt in growth was "a one-time aberration." Nearly half the 4.7% rate-2.2 percentage points- "resulted from a huge and unlikely-to-be-repeated jump in net exports," he said.
Meanwhile, inventory building continued during the fourth quarter, suggesting that trimming will soon be necessary, he said. "This would, of course, subtract from overall GDP growth in 1997."
But others worry that the economy is too strong, and that inflation is bubbling just below the surface.
"The best news about inflation is behind us. The Fed should be buying some insurance now against future inflation," said Sung Won Sohn, chief economist at Norwest Corp., Minneapolis, who nevertheless does not expect a rate hike this week.
Mr. Sohn belongs to the camp of economists who believe a tightening of credit may be overdue. "A case can be made that rates should have been raised last summer," he said.
The financial markets anticipated a rate hike last summer, but minutes of the Fed meetings at the time indicate that Fed Chairman Alan Greenspan was able to allay the concerns of other policymakers and hold rates steady.
Since then, the unemployment rate has stayed around its 20-year low, job creation has remained strong, and the economy has rebounded.
"Ultimately, only evidence of rising inflation will force the Fed to move," said Charles Lieberman, chief economist at Chase Securities, a unit of Chase Manhattan Corp.
"Once inflation increases, the need for tighter policy will be unambiguous, and lengthy explanations become unnecessary," he said. "Anything other than rising inflation keeps the debate alive, however."
Mr. Lieberman does not expect a rate hike this week at the Fed's Tuesday and Wednesday meeting. But he believes the debate "is sure to be contentious" and expects "at least one dissent."
Last summer, a dissenting vote against holding rates steady was cast by Gary H. Stern, president of the Federal Reserve Bank of Minneapolis.
Mr. Stern's term as a voting member of the policy committee was completed at yearend, but Mr. Lieberman expects a dissent to be filed by either Alfred Broaddus or Robert Parry, heads of the district Fed banks in Richmond, Va. and San Francisco.