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Mon, Mar 04, 2002 - Page 21 News List

Economists look for rates to rise


More economists at Wall Street's biggest bond dealers say the Federal Reserve will likely raise interest rates this year amid signs the US economy is pulling out of recession.

A quarter of the economists at the 24 so-called primary dealers raised forecasts and the majority said the central bank will increase its target for overnight loans between banks, or federal funds, to between 2.5 percent and 3.75 percent by year-end, according to a Bloomberg News survey yesterday.

An index of US manufacturing showed the economy is expanding for the first time since July 2000, a sign factories have boosted production to meet demand. Rising retail sales and durable goods orders, combined with falling weekly jobless claims, signal the recession that began a year ago may be over, they said.

They expect the world's largest economy to grow at about a 3 percent pace this year.

"We've turned the corner," said David Greenlaw, an economist at Morgan Stanley Dean Witter. "Manufacturing seems to be on the upswing, the consumer is in good shape and the labor market is improving."

Economists at Goldman, Sachs & Co abandoned last month's forecast of an additional rate cut.

Six economists including Steve Slifer at Lehman Brothers Inc, Cary Leahey at Deutsche Bank Alex Brown and Ian Morris at HSBC Securities USA Inc, raised forecasts for the central bank's target interest rate. The changes reflected expectations for an economic recovery fueled, in part, by the Fed's 4.75 percentage points of rate cuts last year.

"The Fed is concerned the rate reductions enacted after Sept. 11, while necessary at the time, will overheat the economy in 2003," said Leahy, who sees a 2.5 percent year-end target.

Four of the Fed's rate cuts totaling 1.25 percentage points came after the Sept. 11 terrorist attacks.

An increase in consumer and investment spending led to stronger-than-expected economic growth in the first quarter, he said. The first quarter-point increase will come at the Fed's Aug. 13 meeting and year-over-year growth will climb to 3 1/4 percent, he predicted.

Eleven of the economists expect the first increase in the fed funds target to come during the third quarter. Seven said the Fed would wait until the October-December period.

Fed Chairman Alan Greenspan's testimony to Congress on Wednesday provided evidence the central bank won't change its target or assessment of the economy when it meets on March 19, the economists said. All expect the Fed to leave its target unchanged at 1.75 percent next month, and 23 said policy makers will say the economy is still at risk of weakening.

Fed officials see only a "moderate expansion of consumption spending" in coming months, which means the strength of the recovery will depend on how quickly business investment accelerates, Greenspan said in his testimony.

"Greenspan is less optimistic, but he will be dragged along as the data show more momentum," Morgan Stanley's Greenlaw said.

"He's not there now, but by August, he may be more in synch."

Eleven reductions last year dropped the fed funds target to a 40-year low of 1.75 percent, helping to stimulate a home mortgage refinancing wave that injected more than US$50 billion into the economy. Consumer spending never faltered during the recession, helping the economy to grow at a faster-than-expected pace of 1.4 percent in the fourth quarter. The situation has been different for companies, which slowed their investments as profits fell. Sprint Corp lowered its capital spending for the year today to US$6.4 billion from US$6.8 billion.

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