Faced with an economy that is ending 1994 with a bang, the Federal Reserve Bank is expected to raise rates further in 1995 to keep a lid on inflation, observers said.
"They are ready to go further," said David Jones, veteran Fed watcher and chief economist at Wall Street broker Aubrey G. Lanston and Co.
The decision not to raise interest rates, made Tuesday by the central bank's policy-making Federal Open Market Committee, was anticipated and caused barely a ripple in the financial markets. The Fed has raised rates by 2.5 percentage points this year, including a bigger-than-expected three-quarter point increase just last month.
The inflation-wary Fed is at a crossroads. It knows the economy is ending 1994 strongly, but it expects growth to slow next year as tighter credit begins to bite.
Federal Reserve Chairman Alan Greenspan "is trying to walk the fine line between getting the economy on a gradual glide growth path and not tightening too much to cause a recession," Lanston's Jones said.
So far, the Fed's rate increases have had little discernible impact on the economy.
Early signs were that consumers were spending briskly for the holidays. That, along with strong manufacturing activity, was expected to power the economy to a growth rate of about 4 percent a year in the final three months of 1994 -- well above the 2.5 to 3 percent pace the Fed is aiming for to keep a lid on inflation.
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