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US Fed may raise interest rate in September: Lehman

Lehman Brothers Holdings Inc said the Federal Reserve may raise its target interest rate from 1 percent as soon as September, followed by another increase in December, after government reports showing gains in employment, retail sales and consumer prices.

Lehman, one of the 23 primary dealers of US government securities that trade with the Fed's New York branch, expects the central bank will raise its key rate to 1.25 percent in September, and to 1.5 percent by December.

Economists at the firm had previously expected the Fed would keep rates at the 45-year low of 1 percent through the first quarter of 2005.

The securities firm made the change after a government report today showed the consumer price index rose 0.5 percent last month, a fourth straight increase, boosted by rising energy, transportation and clothing costs. Excluding energy and food, core prices climbed the most in two years.

The Fed "would be able to accept very high rates of employment growth if inflation remains tame," Drew Matus, a senior economist at Lehman, said in an interview.

"Unfortunately now we're in a situation where inflation might not remain tame, and therefore the Fed might have to be a little more preemptive," Matus said.

Banc of America Securities LLC said a rate increase would happen even sooner than September, with August being "the latest likely date."

Bank One Corp joined Lehman in predicting rate boosts in September and December. Banc of America and Bank One are also primary dealers.

Lehman raised its forecast for first quarter GDP growth to 4.7 percent from 4 percent, and boosted its second quarter prediction to 4.5 percent from 4 percent.

On Wednesday, the government said retail sales jumped 1.8 percent last month, compared with expectations for a 0.7 percent increase.

On April 2, the government said the economy last month added 308,00 jobs, the most jobs in almost four years.

"Clearly some of this strength is a fluke and some if it reflects high tax refunds, but the gains are too big to completely dismiss," Ethan Harris, Lehman's chief US economist said in a research note.
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