Experts: Fed Likely to Hike Rates Again

Published March 28, 2006

| Associated Press

While the Federal Reserve has a new chairman for the first time in nearly two decades, it is not likely to change the central bank's two-year pattern of pushing interest rates higher.

Economists widely believe that Ben Bernanke will take over where his predecessor Alan Greenspan left off — boosting interest rates at the conclusion of Tuesday's meeting, again by one-quarter of a percentage point.

Click here to visit FOXBusiness.com's Investing page.

They said the more important information to come from the deliberations would be any possible change in the wording of the Fed's statement, providing clues about where rates will go in the future.

"The real question is not what he does, but what he says," said David Wyss, chief economist at Standard & Poor's in New York.

The rate-raising campaign started in June of 2004 under Greenspan. Since then, the Fed has pushed the federal funds rate, the interest that banks charge each other on overnight loans, from a 46-year low of 1 percent to the current level of 4.5 percent. In all, there were 14 increases, each by one-quarter of a percentage point.

They have pushed banks' prime lending rate, the benchmark for millions of consumer and business loans, from 4 percent to 7.5 percent before Tuesday's meeting.

The expected 15th rate increase would leave the funds rate at a five-year high of 4.75 percent; commercial banks would be expected to respond by pushing the prime rate up to 7.75 percent.

Analysts are split on what will happen after this meeting.

Many believe the Fed will boost rates one more time, to 5 percent, at the next meeting on May 10 and then move to the sidelines for the rest of the year.

Economists who hold this view believe Fed officials will decide to take a breather because they are seeing signs the previous increases are beginning to have the desired effect of slowing economic growth just enough to ensure inflation does not get out of hand.

This impact is most evident in the formerly red-hot housing market. Sales of existing homes have fallen in five of the past six months and sales of new homes dropped in February by the largest amount in nearly nine years.

Other economists believe the central bank may not stop at 5 percent, but keep going with perhaps two more rate increases, especially if inflation pressures become more worrisome.

These analysts note that various Fed officials in recent weeks have expressed greater worries about inflation than that the economy may slow too much under the impact of the previous rate increases.

"These inflation concerns point to more rather than less tightening by the Fed in coming months," said Nariman Behravesh, chief economist at Global Insight, a forecasting firm.

Lyle Gramley, a former Fed board member and now an economic adviser with Schwab Washington Research Group, said he believes the central bank will keep lifting rates until there are definite signs the economy is slowing.

"A combination of a downturn in housing and a slowdown of consumer spending should do the trick, but the Fed does not know for sure right now whether that will occur," Gramley said.

Analysts agreed that the Fed, in its economic statement explaining Tuesday's decision, will emphasize that future moves will depend greatly on incoming economic data.

And some believe the brief one-page statement the Fed issues announcing its rate decisions may grow longer under Bernanke.

The former Princeton economics professor who took over at the Fed on Feb. 1 when Greenspan retired was a Fed board member for three years. He also headed President Bush's Council of Economic Advisors.

"I think the statements will become more lengthy because of Bernanke's academic bent and his previous support for having the Fed be more open about its thinking," said David Jones, head of DMJ Advisors, an economic consulting firm.

Click here to visit FOXBusiness.com's Investing page.

URL

http://www.foxnews.com/story/2006/03/28/experts-fed-likely-to-hike-rates-again