TURBULENT TIMES MANAGING THE ECONOMY / THE NATIONAL DEBATE : Furor Grows Over Fed Policy : Democrats Complain Rising Interest Rates Will Choke Recovery

WASHINGTON — Tempers flared in Congress on Wednesday over the Federal Reserve Board’s policy of gradually pushing up interest rates, as Democratic senators complained that rising mortgage costs will choke off the nation’s housing recovery and threaten the health of small businesses across the country.

The Fed “keeps picking up false signals” of inflation, complained Sen. Jim Sasser (D-Tenn.), referring to the central bank’s efforts to keep the economy from overheating. Sen. Paul Sarbanes (D-Md.) accused the Fed of “feeding anxieties about something that is not warranted.”

The anger on Capitol Hill comes a day after Congress’ joint economic committee criticized the rate hikes in its annual report on the U.S. economy. “Perhaps the greatest threat to sustained recovery would be continuing and unwarranted increases in interest rates,” the committee report said.

Fed officials were not invited to testify at Wednesday’s hearing. However, the central bank has maintained that the interest rate increases--three since February--are necessary to head off excessive economic growth.

But some leading Democrats, who have generally adhered to the Clinton Administration’s careful policy of avoiding overt attacks on the Fed, appear to have run out of political patience with this approach.

At a hearing of the Senate Banking Committee’s housing subcommittee, Sarbanes, Sasser and other senators listened in dismay as officials of the National Assn. of Homebuilders warned that rising mortgage rates are driving thousands of potential buyers from the market.

Since the Fed began tightening the money supply, mortgage rates for 30-year, fixed-rate loans have climbed from 6.97% to to 8.49%, noted Sarbanes, the subcommittee chairman.

The Fed “seems poised to tighten policy further, despite the damage already done to long-term interest rates, including interest rates on home mortgages,” Kent Colton, executive vice president of the NAHB, told the subcommittee.

Colton said the rising rates will cut into expectations that 1994 will be the best year for single-family housing construction since 1979. He said the recent rise in rates will cut housing starts 38,000 for this year and 58,000 in 1995, if interest rates stay where they are now.

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Rising mortgage rates pose a particular problem in California, Colton said in an interview after the hearing.

“In California, they’ve been bumping along the bottom, and things are just beginning to pick up,” he said. “They look to housing to help drive the recovery in Los Angeles.”

The rising mortgage rates “haven’t choked off” the housing upturn in California, he noted, “but a fragile recovery has become even more tenuous.”

Thomas N. Thompson, a Kentucky home builder and NAHB president, said rising mortgage costs have wiped out the sales contracts of three homes he was building, priced at $55,000 to $60,000, because the buyers could no longer afford to pay the higher monthly mortgages.

In another subdivision, plans were redrawn to make the houses smaller to keep the payments affordable, he said.

Small businesses joined home builders in using the hearing as a platform to protest the Fed’s policies.

“ ‘Fragile’ is how we would describe the state of the small-business economic recovery,” said John S. Satagaj, president of the Small Business Legislative Council, a coalition of nearly 100 trade and professional groups. The group’s members are active in diverse fields, including manufacturing, retailing, agriculture, construction and transportation.

A survey of members, who depend on lines of credit and loans with variable rates, showed that 81% are upset and alarmed with Fed actions, he said.

“While we share the concerns of the Fed regarding the impact of inflation and inflationary expectations, we believe their actions . . . are premature,” Satagaj said. “We believe we run the risk of nipping the economic recovery in the bud.”

* Nations move to prop up the dollar. A1

* Fed sees U.S. economy growing solidly. D2