Fed up again.

"THESE MEASURES were taken against the background of evidence of persistent strength in economic activity and high and rising levels of resource utilization." So went the dry prose accompanying the Federal Reserve's latest interest-rate increase of 3/4 of a percentage point, the largest rate hike since 1981, a time when double-digit inflation still raged. But there is no rapid inflation today. Instead, the Fed is fighting economic growth, arguing that too much production, new jobs, and prosperity are bad things. This despite evidence that the current recovery is proceeding at only one-half the pace of the 1980s recovery. Indeed, because the economy has grown at only a 1.9 per cent annual rate over the past five years--compared to its 3.1 per cent post-World War II trend--real GDP in 1994 is likely to fall $1.6 trillion below what it should have been.

Why, then, is the Fed so opposed to this year's 4 per cent catch-up growth spurt? Greenspan, Blinder & Co. have determined that anything above 2.5 per cent growth, or below 6 per cent unemployment, will reignite inflation. Yet inflation is a problem created by too much monetary growth, not too many people working. There is no Phillips Curve trade-off between inflation and unemployment.

The Fed created too much money in 1993, and this will result in a temporary inflation rise during the year ahead. But it has moved steadily in 1994 to pull money out of the economy, reducing the growth of Federal Reserve credit to less than 6 per cent so far this year, compared to 13 per cent last year. In response, commodity indexes have flattened out, gold recently drifted down to the low $380s, bond prices have improved, and even the dollar has stabilized. So the Fed has atoned for last year's sins. Since forward-looking market prices suggest that the inflation threat is receding, there is no need for additional interest-rate hikes.

What's more, if the new GOP Congress succeeds in legislating an economic program of smaller government and lower taxes, then a more productive and efficient private sector will raise the public's demand for liquidity. In classical terms, this means the same quantity of money will be chasing more goods, thus lowering inflation. Perhaps this is why the latest Conference Board report on consumer confidence showed a remarkable 19 per cent post-election surge.

As long as gold continues to ease down, the Fed should not hold back the economy. Neither Alan Greenspan nor anyone else can possibly know the "right" rate of unemployment or growth. The Fed should leave well enough alone.