Expect higher interest rates from the Federal Reserve in the months ahead. It’s more of a mystery whether policy-makers will extend their 18-month credit-tightening campaign beyond Alan Greenspan’s tenure.
The central bank has increased rates gradually for 18 months to control inflation. At tomorrow’s meeting, the Fed is expected to add one-quarter of a percentage point to an important short-term interest rate, known as the federal funds rate.
That would mark the 13th increase since June 2004 and would put the rate at 4.25 percent, the highest in more than four years.
Economists are divided about what will happen after that, saying the Fed could:
Boost rates by one-quarter of a percentage point at its next meeting, on Jan. 31, and then stop.
Vote for an increase in both January and at the subsequent meeting, on March 28, and then move to the sidelines.
Commit to the campaign until the funds rate, the interest banks charge each other on overnight loans, reaches 5 percent.
“There is short-term certainty and medium-term mystery for the Fed,” said Carl Tannenbaum, chief economist at LaSalle Bank, who is in the 5 percent camp.
The Fed has nudged up the funds rate in an effort to keep the economy on an even keel and inflation in check. Changes to this rate influence a range of interest rates for consumers and businesses.
If the Fed acts as expected tomorrow, the prime lending rate — for certain credit cards, home equity lines of credit and other loans — would increase to 7.25 percent, the highest in more than four years.
The January meeting will be Mr. Greenspan’s last. Ben Bernanke, the White House’s chief economist, is President Bush’s choice to succeed Mr. Greenspan.
Mr. Bernanke is expected take over Feb. 1, after Senate confirmation, and preside over his first meeting as Fed chief in March.
The changing of the economic guard at the Fed raises some uncertainties in terms of economists’ outlook for interest rates.
But there also is the challenge of accurately predicting how the economy will fare, months from now, on employment, production and inflation. That is what Fed policy-makers must do when they make interest-rate decisions.
Economic barometers have shown positive signs:
The economy grew at an energetic 4.3 percent in the third quarter, from July through September, despite the ill effects from the Gulf Coast hurricanes.
Growth is expected to be solid in the current October-to-December period.
Employment rebounded in November after a two-month lull, with payrolls expanding by 215,000.
Inflation, excluding energy and food prices, appears to be well-behaved.
Yet there are concerns.
Economists worry that inflation could pick up, especially given record-high natural gas prices. Others fret that a sharper-than-anticipated slowdown in the housing market could drag down overall economic activity.
Against this backdrop, Fed policy-makers at their Nov. 1 meeting suggested that their predictable rate-raising campaign could turn less predictable.
Minutes of the meeting show they discussed altering language in the statements on interest rates that they issue after their sessions. Investors and other Fed watchers parse those statements for clues about future moves on rates.
“Several aspects of the statement language would have to be changed before long, particularly those related to the characterization and the outlook for policy,” the minutes said.
Since embarking on its series of interest rate increases, the Fed has said “policy accommodation can be removed at a pace that is likely to be measured.” The word “measured” is seen as indicating that increases of one-quarter of a percentage points can be expected in the future.
If that phrase is omitted in the statement that follows tomorrow’s meeting, it could mean the Fed is nearing the end of its rate-raising campaign, said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group.