Wall St. Sees Fed Rate Hike, Shift in Tone

The Federal Reserve is set to make perhaps its last predictable move higher on interest rates at next week's meeting, and will probably indicate the future path of policy is less certain, according to a Reuters poll.

The survey of the top economists on Wall Street, taken on Thursday, found all 21 analysts surveyed expected another quarter-percentage-point hike in the benchmark federal funds rate to 4.5 percent on Tuesday. It would be the 14th such increase since the Fed began the process in June 2004.

With economic growth expected to improve from a softer end to 2005 and inflation holding steady, Wall Street sees no need for the Fed to pause in tightening just yet. The following meeting in March is seen as a strong bet for another move.

At Tuesday's meeting, which will also be Fed Chairman Alan Greenspan's last day on the job after 18-1/2 years at the helm, policymakers are expected to allow greater flexibility for the future by offering fewer clues about their plans in the statement that accompanies their decision on rates.

"They've been on this long path towards neutral policy and now that we're in that range, they may decide it would be appropriate to soften the message they are sending out," said Dresdner Kleinwort Wasserstein senior economist Kevin Logan.

Neutral policy is a zone that no longer stimulates the economy, but does not yet hamper growth either.

Since August 2003, the Fed has been dropping big hints in each statement about the likelihood of its next move, to help guide market expectations.

After its last move in December, the Fed stated "some further measured policy firming is likely," cementing expectations for a January hike.

But the Reuters survey found the majority of economists expect that pledge to be dropped or modified, perhaps to say that further tightening "may be needed", a subtle change that leaves the door open to a pause by the U.S. central bank.

"What they're going to be aiming for is to leave open the question of whether they hike on March 28," said Goldman Sachs senior economist Jan Hatzius.

"They have a lot of reasons to leave that position open, and the two most important are that you have a new chairman coming in and a lot of time between the two meetings."

Ben Bernanke is slated to take over as Fed chairman on Feb. 1, but his first policy-setting meeting is not until March 28, an eight-week gap between meetings rather than the usual six.

Futures markets on Thursday increased the chances that the Fed will continue raising rates past January after a surprising jump in orders for durable goods in December.

Chances for another rate increase in March are inching toward 80 percent after hovering above 50 percent in recent weeks, as the market catches up with the majority of economists on Wall Street.

The Fed "might well amend" its guidance that more tightening is "likely," said Robert Lind, chief economist with ABN AMRO in London.

"Principally it's about not wanting to foreshadow anything ahead of Mr Bernanke's arrival," he said.

The argument for higher rates has been boosted by strong reports on industrial activity and improved weekly unemployment insurance claims, which point to bigger increases in monthly payrolls.

Both touch on areas of concern for the Fed: that higher resource utilization, in the form of a stronger job market and factories running closer to full capacity, could fuel future inflation pressures.

Over 2005, the unemployment rate fell from 5.4 percent to 4.9 percent, close to the area many Fed officials believe is full employment and could trigger wage pressures.

"As long as the economy generates 200,000 jobs a month, the unemployment rate is going to go down and if that happens I think they will keep snugging up monetary policy," said Dresdner's Logan.

The minority of four economists surveyed who see no move in March believe the economy may not bounce back from a soft fourth quarter, and worry that a cooling in the housing market will flow through to consumer spending.

"The Fed should be cautious about over-tightening and causing too much of a downturn in the housing market," said Mizuho economist Glenn Haberbush.