September 21, 2004
By JEANNINE AVERSA
WASHINGTON (AP) - Federal Reserve policy-makers are expected to raise short-term interest rates for a third time this year, part of a gradual process to wean the economy from ultralow rates, which are no longer needed as a bracing tonic.
Although private economists have mixed opinions whether the economy still is working through its late-spring blues or has emerged, most believe the economy is in good enough shape for the Fed to boost rates again.
Despite high energy prices, inflation currently is not a threat to the economy, analysts said. The Fed wants to make sure it doesn't become a problem in the future.
That's why economists believe Fed policy-makers will increase the target for the federal funds rate to 1.75 percent from 1.50 percent at their meeting Tuesday. An afternoon announcement was expected. The funds rate is the interest that banks charge each other on overnight loans and is the Fed's primary tool for influencing the economy.
"The Fed's No. 1 goal here is just to remove some of the unneeded stimulus" and raise rates slowly from emergency levels of liquidity to more normal levels, said Richard Yamarone, economist at Argus Research Corp.
A quarter-point increase in the funds rate would mean that commercial banks' prime lending rate, a benchmark for many short-term consumer and business loans, would climb to 4.75 percent, from 4.50 percent.
The expected Fed rate increase would come with Election Day just six weeks away. President Bush and his Democratic rival, John Kerry, hold widely divergent views of how the economy and the nation's job market are faring.
Incumbent politicians normally are unhappy if the Fed raises interest rates close to an election. Yet, some economists said that by raising rates, the Fed could be viewed as appearing comfortable about the pace of the economy's expansion, which could be seen as good for the Bush campaign.
Fed Chairman Alan Greenspan, appearing before Congress this month, said the economy has "regained some traction" after hitting a "soft patch" in the late spring. He blamed much of that softness on soaring energy prices.
Companies stepped up hiring in August, adding 144,000 jobs, the most since May. Still, the economy is down a net 913,000 jobs since Bush took office.
Private economists believe the economy, which grew at a 2.8 percent annual rate in the second quarter of this year, expanded at a 3 percent to 4 percent pace in the July-to-September quarter.
Even with the expected increases, both the funds rate and the prime rate still would be considered low by historical standards, analysts said.
Before the Fed ordered its first rate increase of the year in June, the funds rate had been kept for a year at 1 percent, a 46-year low, to help support the economy.
A series of 13 rate reductions that began in January 2001 and ended in June 2003 left the funds rate at the 1 percent level. During that period, the Fed battled to help an economy staggered by a series of blows from a plunging stock market and the 2001 recession to terrorist attacks and two wars.
With the economy out of crisis and in an expansion mode, the funds rate needs to go up, analysts said. "By moving rates up slowly, when the time comes when you really need higher rates the Fed won't have to shock the economy by jacking up rates," said Anthony Chan, economist at JPMorgan Fleming Asset Management.
Analysts believe the funds rate will rise to 2 percent by the end of this year. Economists, however, have mixed opinions on how additional rate increases will unfold after Tuesday's meeting. Some economists believe the Fed will boost rates again at its Nov. 10 meeting, then stand pat Dec. 14, its last meeting of the year, which comes deep into the holiday shopping season. Others believe the Fed might take a breather at the November meeting but raise rates in December.
Sung Won Sohn, chief economist at Wells Fargo, describes the Fed's rate-raising campaign as having two stages.
The first stage aims to bring the funds rate to 2 percent by the end of this year, Sohn said. "The first stage is to eliminate the emergency level of liquidity, provided after 9/11," he said.
The second stage, he said, is for the funds rate to climb to around 4 percent by the end of 2005. The pace of rate increases in the second stage, Sohn said, will depend on what economic data says about the economy and inflation.
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On the Net:
Federal Open Market Committee: http://www.federalreserve.gov/fomc/
http://apnews.myway.com/article/20040921/D85818UO0.html