THE FED . . . THE OTHER SHOE DROPS

The Federal Reserveincreased two key interest ratesby three-quarters of a percentage point, the sixth hike this year, and the largest in 13 years. Several major money center banks immediately responded by raising prime lending rates to a three-year high of 8.5 percent. Economists and business leaders said the Fed action undermines a thriving U.S. economy and could threaten continuing economic growth by slowing consumer spending. But other economic observers said the rate hike could assure the economy of a soft landing at the end of the current economic cycle, limiting the impact of roller-coaster economic growth. (See MONEYWATCH at end of Time Daily for the cuts' impact on consumers and financial markets.)The move exceeded most Fed-watchers' predictions and will raise the cost of borrowing for millions of Americans, throwing a wet blanket on newly-empowered Republicans' plans to cut taxes and also send other conservative economic programs into orbit. Clinton administration officials, who have refrained from criticizing the earlier Fed efforts to put the brakes on economic recovery to prevent inflation, merely emphasized the Fed's policy-making freedom. But congressional Democrats howled: House Budget Committee Chairman Martin Sabo, D-Minn., for example, said the two rate increases would hurt "working men and women who have not seen their wages keep up with the expanding economy." But politically, says TIME economics correspondent Suneel Ratan, the hike tells the GOP's would-be tax-cutters that the Fed and the bond market will call the economic shots. "They're saying everybody has to be wary of upsetting the apple cart," Ratan says. "If the Republicans try to go for popular tax cuts, then the bond market is going to whip around and bite back."Post your opinion on theWashingtonbulletin board.