Richard Wambold has watched the price of plastic resins, a key raw material in his business, leap about 50 percent in the last nine months. And he knows that some of the increase will have to be passed on to customers who buy Baggies and Hefty trash bags, among his company’s best-known packaging products.
Wambold, president and chief executive of Lake Forest-based Pactiv Corp., also knows that if economic growth were to slow, inflationary pressures might ease, which is why he gives his blessing to Tuesday’s all-but-certain increase in short-term interest rates.
Make no mistake: Wambold is not cheering on Federal Reserve Board Chairman Alan Greenspan. But like other local corporate executives, he is betting–or hoping–that Greenspan’s castor oil strategy will work.
“As a businessperson, I can’t say having to put the brakes on is in my personal best interests,” Wambold said. “But I’d like a nice steady growth rate in the economy, and I’d sacrifice in the short term to get it.”
More Top Picks Badmintons
Sacrificing ground on interest rates has become old hat since June. The Federal Reserve has jacked up the fed funds rate five times–by a quarter percentage point each–over that period in the face of sizzling economic growth. Most analysts expect Greenspan and other Fed policymakers to give rates a half-point jolt Tuesday.
“If I were in his shoes, I’d do the same thing,” Wambold said.
In the thicket of interlocking economic relationships, inflation, labor markets, the stock market, trade deficits, consumer confidence, corporate profits and other economic indicators can and often are affected by interest rate changes, but there are no guarantees Tuesday’s anticipated hike will restore order. In fact, five rate hikes in less than a year have done little to lessen the nagging concern that inflation may derail nearly a decade of economic prosperity.
With joblessness at a 30-year low of 3.9 percent, concern is growing among some economists that the only way to cool the economy is to tighten credit to the point of throwing people out of work. Although some economists believe the Fed already has gone too far in raising rates, a majority believes the effort still has a long way to go.
“If anything, there is a belief the Fed has done too little,” said Chicago economist Robert Dederick, a consultant to Northern Trust Co. “If the Fed has done too much, we won’t know until after the fact.”
Dederick said central bankers are facing a dilemma because pre-emptive rate increases when inflation was largely just a threat have given way to the dual reality of rising wages and prices. This conjures up the potential for spiraling inflation to choke off the expansion.
“It is clear the Fed has failed to ward off inflation’s threat. Even if policymakers raise rates by a half-percent Tuesday, there still may be a need to do something more dramatic,” Dederick said.
Dramatic moves bring to mind the interest rate ratcheting of former Fed Chairman Paul Volcker, who dampened the economic fires of 1982 with a high-interest policy that dragged the nation into recession. Two decades later, Greenspan’s track record of keeping inflation at bay for such an extended period has, for now, bought him some goodwill with many economists and corporate executives.
“Most of us are old enough to remember the screws being tightened too much,” said David Bell, chairman and CEO of Chicago-based advertising and communications company True North Communications Inc.
Miles Marsh, chairman and CEO of Fort James Corp., the Deerfield-based consumer paper products manufacturer, said Greenspan’s performance tends to give him the benefit of most doubts. “I think the Fed has done a pretty good job, never getting into the position of having to make big adjustments,” Marsh said.
Marsh said even a half-point boost won’t affect the operations of Fort James because consumer demand for the company’s toilet paper, Dixie cups and paper towels is not cyclical.
Economist Brian Wesbury is one who believes the Fed could go too far in raising rates.
“People have jumped the gun in anticipating a half-percent move by the Fed,” said Wesbury, of the Chicago investment firm Griffin, Kubik, Stephens & Thomson. “Recent data indicate that economic growth is beginning to moderate. The rate hikes we already have seen are beginning to bite.”
Mortgage rates last week reached their highest levels in five years, according to Freddie Mac, the mortgage company.
For corporations, higher interest rates mean higher borrowing costs, which affect the bottom line, especially for so-called old-economy companies. For consumers, the effect of another Fed hike is a direct impact on credit card payments. For those carrying credit card balances from one month to the next, an increase of 1.75 percentage points translates to nearly $90 a year more in interest on a $5,000 average balance.
Wesbury said the short-term interest rate target set by the Fed is at its highest level in nine years, “and it is time for the Fed to be a bit more cautious.”
True North’s Bell said he is not to worried about Tuesday’s action. On a scale of 1 to 10, Bell measured his anxiety at a 6. “We complain loudly sometimes,” Bell said, “but most of us have seen worse.”