Fed appears certain to raise rates

By Gregory Robb, CBS Marketwatch.com
Nov. 5, 2004

WASHINGTON (CBS.MW) - Federal Reserve policy makers are certain to raise the key lending rate by another small step to 2 percent when they gather Wednesday, analysts say.

"If there were any drama about next week's Fed meeting, it is long gone," Tim O'Neill, chief economist at Bank of Montreal.

A rate increase Wednesday would the fourth consecutive Fed meeting with a quarter-percentage point rise, as the central bank continues its policy of gradual tightening to bring the Fed funds rate back to a more "neutral" level. Neutral is a level that neither helps nor hinders economic growth.

The strong October jobs report makes it more likely that the Fed will raise rates by an identical quarter-percentage point at its Dec. 14 meeting.

Many economists had thought the central bank would hold off raising rates before Christmas to avoid being seen as a Grinch. Some economists still believe the Fed will take a break in December to see how the economy evolves, but many economists have changed their minds.

"If we had had a mediocre jobs number (in October), I think the wisdom of taking a pause in December to get a good look at holiday sales activity would have been wise," said Carl Tannenbaum, chief economist at LaSalle/ABN Amro

"But I would say that unless the November jobs report is disappointing, there is a very good chance they will go ahead with another rate hike in December," he said.

O'Neill at the Bank of Montreal said only weak data would cause Fed policy makers to pause in December.

"We had been forecasting a rate move in December and this job report shores up that prediction," he said.

"You would have to have some pretty strong counter-evidence - either a very bad employment number or broader weakness in retail sales," O'Neill said.

Sun Won Sohn, chief economist at Wells Fargo, said financial markets are "getting much more comfortable with the idea that the Fed will tighten again in December."

He said the futures market is placing the probability of a December rate hike at about 75 percent, which compares with 50 percent a few days earlier.

Ken Goldstein, an economist at the Conference Board, said there will be a pronounced shift in Fed policy once the funds rate hits 2 percent.

He said he expects the Fed to continue to tighten, but the rate hikes won't be automatic. "They will take December off," Goldstein said.

"From now on, it is going to be data-driven," and the coming economic data won't match the glowing October job report, Goldstein said.

"I don't think we are going to get a number as nearly as good in November and December as we clearly got in October," Goldstein said.

Fed watchers don't hold up much hope that the Fed will provide clues to its thinking about December in the statement released after Wednesday's meeting.

"I think they will keep their options open," said Mike Moran, chief economist at Daiwa Securities America.

But one idea seems to have lost currency - that the December meeting would be the first of many where the Fed would keep policy on hold.

Economists now say a pause in December would almost certainly be simply a skip of one meeting, with the Fed picking up where it left off in February.

Most Fed watchers put the funds rate in the range of 3.5 percent at the end of 2005.




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