WASHINGTON – Another small hike in U.S. interest rates is seen as a certainty when Federal Reserve (search) policy-makers meet on Wednesday — a step on the march toward a level of rates necessary to underpin long-term expansion.
Since policy-setting members of the Federal Open Market Committee (search) began raising rates in June, they have edged up the bellwether federal funds rate (search), charged on overnight loans between banks, three times in quarter percentage point stages to 1.75 percent.
There is virtually unanimous agreement among analysts that a matching incremental increase will be announced on Wednesday to bring the fed funds rate to 2 percent and a growing consensus that will not mark the end nor even a pause in the rate-rise cycle.
"The reason for raising rates is that there is still an enormous adjustment to be made considering that we have an economy that is approaching its full potential," said economist Richard DeKaser of National City Corp. in Cleveland.
"At the same time, inflation is no longer declining and in fact has been rising and, in all likelihood, is back within the Fed's 'comfort zone' of 1.5 percent to 2 percent," he added.
Economic growth, measured by performance of gross domestic product that measures the value of all goods and services produced within U.S. borders, has advanced steadily at annual rates exceeding 3 percent for the past six quarters.
The Fed's job is to protect the economy's ability to grow by tuning monetary policy in a manner that keeps interest rates at levels that dampen the potential for runaway price rises.
DeKaser noted that a so-called "neutral" level for interest rates — that neither hampers growth nor fosters inflation — is generally considered to be about two percent above the prevailing pace of price rises, somewhere around 3-1/2 percent to 4-1/2 percent currently.
That argues the expected 2 percent federal funds rate likely to be in place after Wednesday's meeting is only a step on a stairway that will bring another step upward when the FOMC meets on Dec. 14.
"With the U.S. economy showing the resiliency it has through 2004 and the distance between where the fed funds rate target is relative to where it needs to be still sizable, the measured pace of policy adjustment is not likely to pause any time soon," said New York-based economist Ram Bhagavatula of the Royal Bank of Scotland.
The Fed's position, generally accepted, is that its actions since June are only intended to get official rates back to more normal levels after dropping them to a 46-year low 1 percent.
After each rate-rising FOMC meeting, policymakers have emphasized that "even after this action...the stance of monetary policy remains accommodative" so there is more room to go until a balanced rate is reached.
Fed Chairman Alan Greenspan (search) famously said policymakers won't know when a neutral rate is reached "until we get there," not a facetious remark but one that recognizes the fluid state of economic activity and its measurement.
Until last Friday's surprisingly robust report on the nation's labor market — showing 337,000 jobs created last month plus 113,000 more than previously thought in August and September — many had thought there might be a pause in rate rises after this week.
Far fewer think so now.
"As long as the bond markets don't turn skittish in response to growth and inflation data in coming quarters, this 'steady as you go' pace of fed funds rate increases is likely to continue until the funds rate target hits 3-1/2 percent next summer," Bhagavatula predicted.