Newspaper article THE JOURNAL RECORD

Policymakers Poised to Drive Interest Rates Higher

Newspaper article THE JOURNAL RECORD

Policymakers Poised to Drive Interest Rates Higher

Article excerpt

WASHINGTON - Policymakers at the Federal Reserve, concerned about renewed signs of inflationary pressures, are poised to drive interest rates higher in a move that will put the central bank on a collision course with the incoming Bush administration, private economists said Monday.

Many analysts said the Fed has already begun to tighten credit conditions and they predicted that its Federal Open Market Committee will vote for more restrictive policies at closed-door strategy sessions today and Wednesday.

Analysts said they based this belief on the fact that recent economic statistics have pointed to an economy still barreling ahead, with inflationary pressures rising.

Unemployment, at 5.4 percent in November, is close to 14-year lows, leading many economists to worry that tight labor markets and high factory operating rates will trigger price increases as production constraints bump up against high demand.

``The data on growth and inflation clearly suggest the need for further tightening,'' said Allen Sinai, chief economist of the Boston Co. in New York.

Major banks boosted their prime lending rate two weeks ago to 10.5 percent, the fourth increase this year and the highest level for this benchmark business and consumer rate since mid-1985.

Many economists said they were looking for the prime rate to move up to 11 percent by late January, with similar increases in other interest rates.

David Jones, an economist with Aubrey G. Lanston & Co., a government securities dealer, said he expects mortgage rates that averaged 10.46 percent for 30-year, fixed-rate mortgages last week to climb.

``By early next year, I would look for mortgage rates to be around 11 percent to 11.25 percent and rising,'' he said. ``Mortgage borrowers should borrow now instead of waiting.''

Many economists said they were looking for another rise in banks' prime lending rate, but some said they did not think it would occur until the Fed hikes its discount rate, a move they predicted would occur by late January.

An increase in the discount rate - the interest the central bank charges on loans to member commercial banks - is the most dramatic signal the Fed can send of its intention to push interest rates higher as a way of slowing an overheated economy.

The Fed last hiked the discount rate on Aug. 9, pushing it to 6.5 percent. That move capped a series of less-noticeable credit tightening steps the central bank had begun in late March.

The Fed can also influence interest rates by selling U.S. Treasury securities to banks, reducing the amount of money the banks have to support their loan activities. …

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