Rates rise increases to continue

10.11.2004

WASHINGTON - Another small hike in United States interest rates is seen as a certainty when Federal Reserve policy-makers meet today.

Since policy-setting members of the Federal Open Market Committee began raising rates in June, they have edged up the federal funds rate, charged on overnight loans between banks, three times, to 1.75 per cent.

Analysts agree almost unanimously that another increase will be announced today to bring the fed funds rate to 2 per cent and there is a growing consensus that the increases will continue.

"There is still an enormous adjustment to be made considering that we have an economy that is approaching its full potential," said economist Richard DeKaser of National City, Cleveland.

"At the same time, inflation is no longer declining and, in fact, has been rising and, in all likelihood, is back within the Fed's 'comfort zone' of 1.5 to 2 per cent."

Economic growth, measured by gross domestic product, has been at an annual rate of more than 3 per cent for the past six quarters.

The Fed's job is to protect the economy's ability to grow by tuning monetary policy to keep interest rates at levels that dampen the potential for runaway inflation.

DeKaser noted that a so-called "neutral" level for interest rates - which neither hampers growth nor fosters inflation - is generally considered to be about 2 per cent above prevailing price rises, meaning around 3.5 per cent to 4.5 per cent at present.

That means the expected 2 per cent federal funds rate likely to be in place after today's meeting is only one step, and another will follow next month.

New York-based economist Ram Bhagavatula, of the Royal Bank of Scotland, said that "with the US economy showing the resilience it has through 2004 and the distance between where the fed funds rate target is, relative to where it needs to be, still sizeable, the measured pace of policy adjustment is not likely to pause any time soon".

The Fed's generally accepted position is that its actions since June are intended only to get official rates back to more normal levels, after dropping them to a 46-year low of 1 per cent.

After each rate-rising meeting, policymakers have emphasised that "even after this action ... the stance of monetary policy remains accommodative", so there is more room to go before reaching a balanced rate.

Fed chairman Alan Greenspan famously said policymakers would not know when a neutral rate was reached "until we get there". Rather than being facetious, his remark recognised the fluid state of economic activity.

Until last week's surprisingly robust report on the nation's labour market - showing 337,000 jobs created last month plus 113,000 more than previously thought in August and September - many had thought there might be a pause in rate rises after this week.

Few think so now.

- REUTERS