ICS Magazine

Fed Likely to Keep Hiking Rates Into 2005

December 14, 2004
WASHINGTON (AP) -- Federal Reserve policy-makers probably will keep pushing up short-term interest rates into 2005 so that a relatively spirited economy doesn't produce unwanted inflation down the road.

While the frequency of expected rate increases next year will depend on how economic activity and inflation unfold in the coming months, private economists say consumers and businesses should prepare themselves for higher interest rates.

With the economy moving solidly ahead, Fed Chairman Alan Greenspan and his colleagues will continue to boost a key short-term interest rate, which had been at extraordinarily low levels, to a more normal level. The pre-emptive increases should help protect the economy against a dangerous inflation flare-up.

Against that backdrop, economists predict Greenspan and his colleagues will increase the target for the federal funds rate to 2.25 percent from 2 percent on Tuesday, their last regularly scheduled session of 2004. The meeting got under way in the morning; an afternoon announcement was expected.

That would mark the fifth increase this year in the funds rate, the interest banks charge each other on overnight loans. That rate is the Fed's main tool for influencing economic activity.

"The Fed will do what it has advertised for some time, raising short-term interest rates at a measured pace," said Anthony Chan, senior economist at JPMorgan Fleming Asset Management. "I also think the Fed will give the message that it doesn't see any significant turbulence ahead to deviate from that path."

A quarter-point increase in the funds rate would mean that commercial banks' prime lending rate, the benchmark for many short-term consumer and business loans, would climb to 5.25 percent, from 5 percent. The prime rate moves in lockstep with the funds rate.

Since June, when the Fed's rate-raising campaign started, each of its four rate moves have been quarter-point increases. Before the Fed acted in June, the funds rate had stood at 1 percent, a 46-year low. Extra-low rates had been used as a tonic to help the economy recover from the 2001 recession.

These days the economy is back in a groove. Economic growth increased at an annual rate of 3.9 percent in the July-to-September quarter. Some analysts believe it is expanding at a slightly faster pace in the current October-to-December quarter.

Economists are heartened that high energy prices haven't seriously sapped the spending of consumers, the economy's lifeblood.

A report, issued by the government Monday, revealed shoppers pushed up sales at the nation's retailers by a strong 0.8 percent in October and by 0.1 percent in November. People cut back on automobile purchases, but November's showing still was better than the flat performance analysts were forecasting.