Some See Dangerous Foreign Fallout From Fed's Move

The new U.S. monetary combination of a 5.25% federal funds rate and a 4.75% discount rate isn't likely to significantly slow the U.S. economy but will jeopardize economic recovery in Asia, Russia, and Latin America, warns a disappointed Jerry Jasinowski, president of the National Assn. of Manufacturers, Washington, D.C. On Aug. 24, Federal Reserve Chairman Alan Greenspan and his colleagues on the Federal Open Market Committee (FOMC) boosted both the closely watched "master" federal funds rate and the less-important discount rate by 25 basis points (a quarter percentage point). "To bring the global economy out of its slump, the United States needs to act as a locomotive, and a rate hike only steepens the grade up which we're pulling the global economy," Jasinowski says. Meanwhile Lawrence Chimerine, chief economist at the Economic Strategy Institute, Washington, D.C., is chiding the Fed for fighting "phantom" inflation. The interest rate hike by the Fed implies that it believes the U.S. economy is overheated, and a jolt to trade-sensitive industries from a surge in the global economy would add to domestic growth and create inflationary pressures, Chimerine says. But trade-sensitive and commodity-producing industries account for less than 25% of total demand, thus having limited impact on inflation, he stresses. The FOMC's next scheduled meeting is Oct. 5. And unless the U.S. inflation rate rises dramatically between now and then, the betting is that Greenspan & Co. will not raise short-term interest rates again.