Holding Inflation at Bay

WALL Street reacted with restraint to news this week that the Federal Reserve Board had again boosted short-term interest rates to head off future inflation. The stock market dipped only slightly following the Fed's announcement; yields on long-term bonds dropped. That compares favorably with what happened following the Fed's decision to boost rates on Feb. 4. Back then the Dow Jones industrial average tumbled 96 points and long-term rates rose.

The Fed's latest rate hike had been widely expected and was eagerly sought by the bond market, which abhors any potential threat of higher inflation. As the Fed, through chairman Alan Greenspan, has repeatedly indicated, the decision to boost interest rates is not linked to current inflation threats, but to expectations of future inflation.

But are there yet any hints of inflationary clouds moving in on the horizon?

The consensus among economists is that inflation remains tame, and that consumer prices will increase around 3 percent for 1994, about the same level as the past three years. Some economists believe the inflation rate actually will fall. Labor costs, for example, fell in the fourth quarter of 1993 at the steepest pace in 10 years. And gold, a traditional harbinger of higher inflation, has yet to show a significant upward spike in price.

In general terms, the Fed's wariness regarding inflation is warranted: Inflation is particularly cruel to people on fixed incomes. Still, it would be a mistake to allow legitimate wariness about the future to inhibit the need for continued growth now, following the economic sluggishness and crimped job market of the early 1990s. Moreover, economic expansion in the United States has been one of the factors propelling growth abroad, particularly in Europe. A series of interest-rate hikes could undermine those gains.

Wall Street already is anticipating additional rate hikes this year. While the bond market might welcome such moves, many members of Congress - particularly those who must face voters in this year's midterm elections - are far less sanguine. Lawmakers should be diligent in asking the Fed to justify its rate hikes at a time when inflation as yet poses no serious threat to the American economy and when continued expansion is crucial to ensuring sustained job creation.