Fed official says growth may call for rate increase

WASHINGTON A leading moderate on the Federal Reserve Board warnedThursday that the economy may be overheating, underscoring thewidespread expectation that the central bank will raise interestrates further.

"The economy appears to be growing at an unsustainableabove-trend pace," said Laurence H. Meyer, a Clinton appointee.

Before the Fed's last tightening move, on March 25, FederalReserve Chairman Alan Greenspan dropped broad hints it was coming.The quarter-point increase in the benchmark rate charged on interbankloans, and the anticipation of more, roiled markets for weeksafterward. The Dow Jones industrial average fell steadily to as muchas 10 percent below its mid-March peak before recovering some.Meyer's remarks, though barely disturbing the market, were seenas a warning of more to come when Fed policymakers meet on May 20.The comments are especially significant coming from a board memberviewed on his appointment last year as a bit more willing than theboard's Republican holdovers to risk an inflation outbreak for thesake of lower unemployment.Meyer described the March 25 rate increase as "a small, prudentand pre-emptive step to . . . increase the prospects of acontinuation of an expansion with healthy but sustainable growth andcontinued modest inflation."He said he recognized that inflation, excluding the volatilefood and energy sectors, is at a 30-year low. But he said inflationoften starts in the labor market, as wage increases accelerate, thentransfers to product prices.Meyer said he suspected the nation's unemployment, at 5.2percent in March, already is below a level that can be sustainedwithout inflation accelerating.In such an environment, with the economy starting its seventhyear of expansion, failing to tighten rates when needed would be abigger mistake than raising them unnecessarily, he said.