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US Fed may soon raise interest rates

A majority of Wall Street economists forecast the Federal Reserve will raise the benchmark lending rate this year to prevent an economic recovery from fueling faster inflation.

Most predicted the increases will come after a quarter-point cut to 1.5 percent this month, the last of a series of reductions that began a year ago. Twenty of the 24 economists at banks that trade directly with the Fed predict the central bank will raise its target overnight rate by year-end.

Economists are predicting rate increases -- the first since May 2000 -- as evidence builds the US is recovering from a recession that began in March.

Consumer confidence and a manufacturing index rose in December while new home sales increased in November.

"The Fed has driven rates so low that it will want to start applying the brakes," said Anthony Karydakis, an economist at Banc One Capital Markets Inc in Chicago. He forecasts a 2.75 percent overnight rate at year-end.

"They know that if the economy grows at a robust pace, inflation would be a threat."

Banc of America Securities LLC economist Mickey Levy has the highest year-end rate forecast, 4 percent. Four economists share the lowest forecast of 1.5 percent. They include John Ryding of Bear, Stearns & Co and William Dudley of Goldman, Sachs & Co.

Wall Street economists were wrong in their forecasts for last year. None of the 25 surveyed in late January called for a year-end overnight rate of below 4.5 percent.

The Fed had cut the rate to 3.5 percent even before the Sept. 11 attacks spurred 4 more reductions.

Economic reports released today provided additional signs of a recovery.

US payrolls fell less in December than at any time in the past four months while an index of service companies' business rose to a one-year high.

Other central banks also may raise rates as the world economy recovers. Bank of England Governor Sir Edward George said today he is prepared to increase rates to keep inflation in check.

A cut at the end of this month would bring the overnight rate charged between banks to its lowest level in 40 years. Nineteen of the 24 economists surveyed forecast a reduction at the Fed's Jan. 29-and-30 meeting, which would be the 12th reduction since the rate was 6.5 percent in January last year.

Congress' failure to pass a tax cut and spending bill in December to help aid a recovery makes a reduction this month more likely, according to Avery Shenfeld, a senior economist at CIBC World Markets Inc in Toronto.

"The stimulus bill stalled; as a result, the Fed will want to do one more insurance move," Shenfeld said.

"It's more psychological than anything. The economy needs one more bit of good news."

The forecast by economists contrasts with interest-rate futures traders' expectations that the Fed will leave the rate unchanged at the meeting this month.

Traders see just a 20 percent chance of a reduction, according to the yield on the February fed funds futures contract.
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