Interest Hike Unlikely, UT Professor Says

KNOXVILLE, Tenn. — The latest rise in the nation’s index of leading economic indicators does not warrant an increase in interest rates to control inflation, a University of Tennessee economist said Tuesday.

Dr. William Fox, who heads UT-Knoxville’s Center for Business and Economic Research, said the nation’s steady economic expansion is not the kind of growth that causes inflation.

The index, which forecasts economic activity six to nine months in the future, showed a record sixth consecutive monthly increase for July.

The Wall Street Journal reported Tuesday that the Federal Reserve policy makers are considering raising interest rates one-half of a percentage point unless they see clear signs this month of a slowing economy.

“The increase (in indicators), while signaling continuation of the expansion through the end of 1996 and into 1997, is certainly not at a pace that should signal any kind of response from the Federal Reserve Bank,” Fox said. “At this point we should anticipate the Fed will continue to hold its course, keeping interest rates right about where they are.”

The Wall Street Journal said the central bank could act as soon as its next policy meeting, Sept. 24, unless it finds clear signs of a moderating economy before then.

Fox said an interest rate hike at that date “is definitely jumping the gun.” He said the Fed will most likely find signs that interest rates should hold steady.

“The Fed is going to look at a broad set of signals before it chooses to raise the federal interest rate. I think these broader indicators will suggest that the expansion is sustained, but it is not unusually vigorous.

“What we’re seeing is growth, but at a modest rate, and inflation staying under control. I think in that setting the Fed will not act in any way.”

Fox said Tennessee’s economy, like the nation’s, continues to make slow, steady progress. The state’s monthly index of leading economic indicators has improved for seven straight months, with a combination of low unemployment, low interest rates and fairly strong retail sales, he said.

Contact: Dr. William Fox (423-974-5441)