Fed Rate Hike Not Likely Yet
Unless Federal Reserve policymakers intend to shock financial markets, they won’t be raising the central bank’s benchmark short-term interest rate at Tuesday’s meeting--despite overwhelming evidence that the economy is recovering.
Instead, Fed Chairman Alan Greenspan and cohorts are expected to keep the “federal funds” rate, the Fed’s target rate for overnight loans among banks, at 1.75%, a 40-year low. But they also are expected to change their official “bias” on interest rates to neutral, from what has been a position that emphasized the risks of further economic decline.
A neutral stance would mean the Fed believes the risks to the economy are balanced--meaning that business activity could slump again, or could expand fast enough to threaten higher inflation.
A neutral stance would be the central bank’s initial step toward tightening credit, assuming the economy continues to revive.
A poll of major Treasury bond dealers Friday by Reuters news service showed that 19 of 24 dealers expect the Fed to shift to a neutral stance. As for when the Fed might order its first rate increase, bond dealers and economists are sharply divided. Just eight of the 24 bond dealers expect the first rate hike to come at or before the Fed’s June 26 meeting.
But last week, Laurence Meyer, a Fed governor from 1996 until last month, riled the bond market when he forecast that the central bank would order its first rate increase by midyear, and that the federal funds rate would be at 3% by year’s end and 4.75% by the end of 2003.
Forecasting Fed moves is a dicey business. Few analysts expected the dramatic cuts the Fed made in early 2001.
Most economists believe the Fed would prefer to go slow in raising rates from current generational lows. But its hand could be forced by a significant rise in inflation or by a plunge in the dollar’s value.
So far, inflation has continued to be relatively tame, and the dollar has weakened only modestly against the yen this year, while gaining value against the euro.
