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Fed expected to lift interest rates again

After 18 months in which the US Federal Reserve has been pushing interest rates higher to keep inflation under control, the central bank appears to be getting close to the end of its rate increase campaign.

But there is a divergence of opinion among economists on just when the rate increases will cease. One group thinks the Fed will stop after two more rate increases, while analysts who are more worried about inflation think the central bank could raise rates perhaps four more times.

There is no dispute, however, over what Federal Reserve Chairman Alan Greenspan and his colleagues were to do at yesterday's meeting. Expectations are universal that the Fed would increase the funds rate, the interest that banks charge each other, by a quarter point to 4.25 percent, the highest level since May 2001.

It would mark the 13th time the Fed has raised interest rates since it began tightening credit in June last year when the funds rate stood at a 46-year low of 1 percent.

"Another quarter-point rate hike is baked in the cake," said David Jones, chief economist at DMJ Advisors, a Colorado-based consulting firm. "But we are near the end."

Jones is in the camp that believes the Fed will boost the funds rate at yesterday's meeting and then deliver one more quarter-point increase at Greenspan's final meeting on Jan. 31, leaving the funds rate at 4.5 percent.

But other economists argue that inflation pressures spawned by a surge in energy costs this year will prompt the central bank to keep pushing rates higher even after Greenspan leaves office.

They also believe that Ben Bernanke, who has been nominated to succeed Greenspan, will want to quickly demonstrate his own inflation fighting credentials.

For that reason, they are looking for Bernanke to keep pushing rates higher in small quarter-point increments at his first Fed meeting as chairman on March 28 and possibly a final move at the May 10 meeting.

That would leave the funds rate at 5 percent, a level that some economists believe the central bank may feel is needed to make sure that interest-rate sensitive sectors of the economy such as housing slow enough to keep inflation under control.

"The Fed is looking at an economy right now that is growing strongly with upside risks to inflation," said Lyle Gramley, a former Fed board member and currently senior economic adviser at Schwab Washington Research Group, a financial advisory firm.

Indeed, a variety of recent statistics have come in stronger-than-expected, depicting an economy that is rebounding after the blows delivered by a string of hurricanes and a spike in energy prices.

Hints about the Fed's intentions may come from the wording of its next statement. For all of the rate increases so far, the statements have promised that future increases will occur at a "pace that is likely to be measured," a phrase seen as a signal of more increases to come.
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