<p>The Baltimore Sun May 19, 1998, Tuesday, <p>Copyright 1998 The Baltimore Sun Company <p>May 19, 1998, Tuesday, FINAL EDITION <p>SECTION: EDITORIAL, Pg. 11A <p>HEADLINE: Interest rates must stay put <p>BYLINE: Paul S. Sarbanes <p>THE FEDERAL Reserve's Open Market Committee, which decides whether interest rates go up or down, is scheduled to meet today. Recent reports of continued strong growth and low unemployment in the United States have increased speculation that the Fed may raise rates. This is a good time to address a common misconception about the Federal Reserve's conduct of monetary policy. <p>The Fed has refrained from raising interest rates since March 1997. This has generally been viewed as a neutral policy intended to accommodate the strong performance of the U.S. economy. <p>This analysis overlooks the fact that the rate of inflation has been declining. During the past 12 months, the consumer price index rose only 1.4 percent. This is significantly lower than the 2.7 percent inflation rate of the previous 12 months. Even if the favorable effects of food and energy prices are excluded, inflation rose only 2.3 percent over the past 12 months, the lowest rate since 1966. <p>In the context of declining inflation, the Fed's policy of holding interest rates constant means that real, inflation-adjusted interest rates are rising. The real interest rate has risen over the past year by almost 2 percentage points. It is now at its highest level since October 1989. Federal Reserve Chairman Alan Greenspan acknowledged in February that the "passive" tightening of monetary policy without an explicit vote of the Fed's Open Market Committee was "by no means inadvertent." Real, long-term interest rates, as measured by AAA corporate bonds, have also been rising and stand at their highest level in three years. <p>While the outlook for the U.S. economy remains good, there is a serious possibility that growth will slow this year. The economic turmoil in Asia is expected to have a negative impact on U.S. economic growth. It has already contributed to a sharp deterioration in the U.S. trade balance and a slowdown in manufacturing. <p>In this uncertain environment, the Federal Reserve has been appropriately cautious about raising interest rates. A so-called pre-emptive strike against inflation by raising rates now could unnecessarily slow the U.S. economy before we know the full impact of the Asian crisis. The Fed is already tightening monetary policy as a hedge against inflation by permitting real interest rates to rise. <p>The benefits of sustained economic growth are just being felt throughout the economy. Workers at the middle and low end of the scale are finally beginning to see improvements in their standards of living as inflation continues to decline. The Fed should not short-circuit this process by needlessly raising interest rates. <p>U.S. Sen. Paul S. Sarbanes, D-Md., is the ranking Democrat on the Senate Banking, Housing and Urban Affairs Committee.