Analysts See Sizable Boost in Key Rates by Fed Today : Economy: Many forecasters expect one-half percentage point hike in federal funds rate as well as the discount rate.

From Associated Press

The Federal Reserve is about to send the most dramatic signal yet of its resolve to fight inflation, many private economists predicted Monday on the eve of a meeting of central bank policy-makers.

These analysts are looking for sizable half-point increases in two key interest rates when the central bank meets today.

They said the credit tightening would trigger an almost immediate half-point increase in commercial banks' prime lending rates, the benchmark for many business and consumer loans.

Financial markets have declined three times this year when the Fed made smaller quarter-point boosts in interest rates. But economists believe today's action, if it comes, will have a less-adverse effect. Markets are beginning to sense the Fed's credit tightening is coming to an end, at least for awhile, they said.

Many but not all forecasters expect a one-half percentage point increase in the federal funds rate, the interest banks charge each other on overnight loans. That rate currently stands at 3.75%.

They also are predicting a half-point hike as well in the Fed's discount rate, the interest the Fed charges for direct loans to banks. It stands at 3% and has not been increased since February, 1989.

"Everyone is sure the Fed is going to do something. If they don't act, the markets will be extremely disappointed," said Bruce Steinberg, an economist at Merrill Lynch in New York.

The Fed has moved three times this year--on Feb. 4, March 22 and April 18--to boost the federal funds rate. Fed officials sought to portray the moves as preemptive strikes against inflation and predicted that long-term interest rates might actually fall as the Fed convinces investors that it is being vigilant about inflation.

The reverse has occurred, however. Long-term rates, as measured by 30-year bonds, have risen faster than short-term rates. Some economists blame Federal Reserve Chairman Alan Greenspan's tiny quarter-point efforts for adding uncertainty about just how much credit tightening the Fed intends to do.

That is why many analysts anticipate half-point moves this time. However, this view is far from unanimous. Other analysts believe the central bank will stick with Greenspan's policy of incrementalism, preferring to boost the funds rate by a quarter-point again.

Either way, economists believe the markets will take the latest rate hike more in stride. They base this view on the fact that last week's reports showed that inflation is actually declining, not accelerating, and other recent reports showing the overall economy slowing from its torrid pace of late last year.

On Monday, the government reported that output at the nation's factories, mines and utilities edged up a moderate 0.3% in April. While it was the 11th consecutive increase, it was significantly slower than the pace set in the previous three months.

On the eve of the widely expected rate hikes, financial markets staged a modest rally Monday, with the yield on the key 30-year Treasury bond declining to 7.45%; it had hit an 18-month high of 7.63% just a week ago. The Dow Jones industrial average gained 11.82 points to close at 3,671.50.

Greenspan has insisted that the central bank is not trying to jack interest rates up so high that it chokes off the economic recovery. Rather, it wants to push them into a "neutral" range where they neither spur growth nor deter it. While he has not said where that neutral range may be, some analysts believe the next round of rate hikes may be close to achieving it.

"As we approach policy neutrality, we are approaching the end of the disorderly, uncertain period in financial markets as well," said Allen Sinai, chief economist at Lehman Bros.

"Once the Fed gets to policy neutrality, given the continued low inflation and slowing economy, it is likely to stick there for some time," he said.

Banks have already raised their prime lending rate twice this year, following the last two Fed rate hikes, and many economists were predicting it would rise to 7% or 7.25%, from 6.75%, on the Fed's next move.

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