Higher Interest Rates? Oh, No : An edgy Fed could step all over any recovery

The merest hint of inflation seems to spook the Federal Reserve Board. The nation’s arbiter of interest rates is worried that accelerating economic growth--good news to most--will drive up prices and wages. Inflation concerns may soon prompt the Fed to nudge up interest rates, for the first time since September, 1992.

That would be a horrible way to start the new year, especially for California, where lower interest rates are helping the housing market to recover. To boost interest rates when consumers and business people are feeling more confident about spending and investing surely would dampen a recovery.

Wouldn’t higher costs for borrowing cut the optimism that appears to be growing in the business community? More than half the executives in a recent survey said they expect the economy to improve further during the first half of next year.

It’s unclear when or even whether the Fed will act. Analysts, however, widely believe Fed Chairman Alan Greenspan was given authority to raise interest rates by at least a quarter of one percentage point during Tuesday’s meeting of the Open Market Committee, which sets interest rate policy for the central bank. But in light of economic data released Wednesday by the Commerce Department, there’s a good case to be made for a delay by the chairman.

The data for the third quarter showed that the economy grew at an upward revised annual rate of 2.9%, the strongest showing of the year. More important from the Fed’s perspective, inflation in the third quarter rose at an annual rate of only 1.6%, the second lowest in 26 years. Corporate profits rose and housing construction shot up at an 11.9% annual rate, helped by sales financed at the lowest mortgage rates in 25 years.

Even in recession-mired California, housing is picking up. The California Assn. of Realtors reported that November home sales hit their highest level since December, 1992. It was the sixth consecutive month that California home sales increased over last year’s levels. After buying homes, consumers typically spend heavily for furnishings and appliances.

The prospect of higher interest rates is unsettling for California, where residents and businesses still are struggling to adapt to the shock of defense industry downsizing. California was one of the last states to be dragged into recession and now looks as though it will be the last to emerge.

A blunt reminder to Greenspan and company as they contemplate a bump-up in short-term rates: Unless there is an economic comeback in California, the nation cannot hope to enjoy a real recovery.