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Wall Street firms predict US Fed will boost rates

The US Federal Reserve will raise interest rates by the end of the year as the pace of economic growth accelerates once the conflict with Iraq is over, a majority of Wall Street's biggest bond-trading firms predict.

The central bank will lift its target rate for overnight loans between banks, or federal funds, said economists at 15 of the 22 firms that trade with the Fed, known as primary dealers.

Policy-makers will leave the target unchanged at this week's meeting at 1.25 percent, the lowest since 1961, according to a Bloomberg News survey.

In addition to the central bank's 12 rate reductions since January 2001, government spending and tax-reduction packages proposed by the White House and Congress are likely to boost corporate profits and spur investment spending, economists said.

With government steps to stimulate the economy and a resolution of the Iraqi situation, economic growth "will be accelerating and led by the business sector," said James Glassman, senior US economist at J.P. Morgan Chase & Co. The first increase will come in September, and economic growth will be at least 3.5 percent this year, he said.

The economy will grow for a third year below 3 percent this year, yet up from 2.4 percent last year, according to this month's Blue Chip Economic Indicators survey.

Fed Chairman Alan Greenspan said last week that the economy is recovering without extra stimulus, the Wall Street Journal reported, citing unidentified senators. Greenspan spoke Thursday at a private meeting of Senate centrists, and told them the economy wasn't in need of any additional fiscal stimulus, according to the newspaper.

Policy-makers cut the fed funds target a larger-than-expected half-percentage point on Nov. 6 to boost flagging growth. The Fed's reductions, which totaled 5.25 percentage points, have laid the foundation for an improving economy once the specter of an attack on Iraq has lifted, economists said.

As US President George W. Bush increased pressure on Iraq to disarm, consumer confidence fell this month for the first time in three months, according to a University of Michigan survey.

To alleviate consumer and business concerns, the Fed will reduce its outlook for the US economy at a two-day meeting this week, economists at four of the firms said.

Policy-makers tomorrow will say weakness poses the greatest risk to the economy, a signal the central bank may cut rates in the months ahead. After its Nov. 6 reduction, the Fed upgraded its assessment of risks to economic growth, saying they are balanced between weakness and inflation.

Economists at four firms -- CIBC World Markets Inc, Dresdner Kleinwort Wasserstein, HSBC Securities Inc, and Lehman Brothers Inc -- forecast a rate cut by the end of March, down from five in a survey last month. The Fed doesn't meet next month.

The timing of rate increases depends on a resolution to the Iraq situation within weeks, economists said.

"People will be able to proceed, both the business sector and consumers, with much less uncertainty" after Iraq ceases to be an issue, said Anthony Karydakis, senior financial economist at Banc One Capital Markets Inc in Chicago, who predicts a rate increase in the third quarter.

Some economists are looking for signs that businesses are spending more before lifting economic growth forecasts. Cash is being diverted as the cost of doing business is rising with the price of crude oil up 69 percent from a year ago, in part on concerns a war against Iraq will cut the flow of oil from the region.

Crude oil has risen to more than US$33 per barrel, from about US$26 at the end of November.
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