Newspaper article THE JOURNAL RECORD

Economists Place Bets on Interest Rate Hike Analysts Doubt Data of Moderate Inflation Will Restrain the Fed

Newspaper article THE JOURNAL RECORD

Economists Place Bets on Interest Rate Hike Analysts Doubt Data of Moderate Inflation Will Restrain the Fed

Article excerpt

NEW YORK -- The Federal Reserve will raise interest rates when policy-makers gather Tuesday, according to economists at most of Wall Street's biggest bond firms.

Robust consumer demand, a booming jobs market, and recent comments from Fed Chairman Alan Greenspan all have economists saying the Fed will apply the brakes to the economy, even though there are few signs that inflation is gathering speed.

"Greenspan's told us about a preemptive move," said Bill Dudley, an economist at Goldman, Sachs & Co. "We have every reason to believe him." A survey of economists, bond strategists and traders at the 37 primary dealers -- the only firms that deal directly with the Fed's securities trading desk -- found that 22 expect central bankers to raise rates next week. Fourteen said they won't, and one wasn't sure. Benchmark 30-year Treasury bond yields have climbed about 30 basis points to 6.98 percent since Greenspan hinted three weeks ago that central bankers were ready to act quickly to keep prices in check. Most who are looking for a rate increase expect the Fed to raise its target for the federal funds rate, the rate on overnight loans between banks, by 25 basis points when its policy board meets next week. Expectations for higher rates are reflected in the yield on the April federal funds futures contract. The yield is at 5.42 percent, or 17 basis points more than the Fed's current target rate for overnight loans, suggesting that investors are putting the odds of a Fed move at about 70 percent. The economy grew at a 3.9 percent annual rate in the fourth quarter, a pace that isn't expected by many economists to slow on its own anytime soon. Greenspan said the Fed estimates annual growth of about 2.5 percent as non-inflationary. Even so, some say a rate increase is far from a done deal. The rise in yields since Greenspan's warning may be enough to slow the economy without a restraining hand from the Fed. "I think they have some leeway to wait and see if the economy slows," said Bruce Steinberg, an economist at Merrill Lynch & Co. "It's not like the inflation numbers are bad. …

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