Federal Reserve officials tomorrow will probably drop their 15-month-old view that weak growth is the biggest risk to the US economy, signaling higher interest rates are coming later this year.
Faster-than-expected fourth-quarter growth, the first increase in jobs since July, rising factory production, and robust retail sales all underscore that the recession that began a year ago is ending, as Fed Chairman Alan Greenspan told Congress earlier this month.
By changing their outlook, central bankers know they are likely to push up some borrowing costs for businesses and consumers, even if they don't raise the Fed's own benchmark lending rate from the current 40-year low of 1.75 percent, analysts said.
"The downturn is over," said former Fed Vice Chairman Alan Blinder, now an economics professor at Princeton. "The challenge now is to tighten, but not do it too abruptly so you stifle recovery."
Analysts at 14 of 22 banks and securities firms that trade directly with the Fed told Bloomberg News that recent economic statistics, and Greenspan's latest remarks, mean the Fed will drop language in its post-meeting statement that "risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."
The yield on the 10-year Treasury note, to which many residential mortgages are tied, has risen more than a quarter- percentage point since Greenspan's March 7 congressional testimony. In turn, the average rate on a 30-year fixed mortgage rose last week to 7.08 percent from 6.87 percent a week earlier, according to Freddie Mac, the No. 2 buyer of US mortgages.
"Rates for mortgages and auto-financings are already going up and could do so further," said Mark Zandi, chief economist at Economy.com in West Chester, Pennsylvania.