Virtual Rate Hike Has Economy Looking Rosy

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In the papers lately, the most common explanation for the markets' recent doldrums is fear that the Fed will raise interest rates this summer. But a sizable chunk of Wall Street's brain trust -- Abby Joseph Cohen of Goldman Sachs; Barton Biggs of Morgan Stanley; Charles Clough of Merrill Lynch; Joseph Battipaglia of Gruntal & Co. and Vincent Farrell of Spears, Benzak, Salomon, Farrell, who all gathered in midtown Wednesday for TIME's Board of Economists meeting -- have a surprise for you: The Fed has raised rates already.

To a man (and woman), the group foresaw no significant tightening by the Fed this year -- maybe a quarter-point, said Farrell with a smile, "just to prove it can do it for practice." But what about inflationary pressures? Economic overheating? Well, say the experts, the Fed already warded off those bogeymen at the last meeting without pushing any buttons on rates. All it had to do was point. Greenspan's "bias shift" toward a hike set the bond market on edge and market interest rates climbing. "The bond market has already done the Fed's work for it," says Cohen. And it's all thanks to the Fed's new policy of announcing such changes right after the FOMC meeting, instead of weeks later when no one's paying attention.

So even if Greenspan decides to sharpen his teeth with a quarter-point cut, the markets have already factored it in. Because of that, the five-member panel agreed, the U.S. economy is headed for a nice soft landing -- just what the Fed loves to bring about when GDP growth starts to creep up to 5 percent, as it did this spring. And that's good news for the markets, which may return to sanity this summer but hardly look due for a serious contraction. "Bear markets come with two things: recession or inflation," says Battipaglia. And thanks to, among other things, the Fed's new tool -- nudging up rates with an invisible hand -- neither one looks likely to rear its head in 1999.

Look for more forecasts from this quarter's TIME Board of Economists in the June 28 issue of the magazine.