Fed likely to slowly raise interest rates
By Barbara Hagenbaugh
USA Today
WASHINGTON — With signs mounting that the economy is on the mend, analysts increasingly expect the Federal Reserve to start raising U.S. interest rates this summer.
But although that means higher rates for mortgages and credit cards, borrowing costs will not be high in 2002, analysts say. That's because rates now are at a 40-year low, so they have a long way to go before borrowing becomes costly.
And the Fed, which meets Tuesday, is not expected to raise rates nearly as rapidly as they slashed them last year.
"They will move because they know they've put a lot of liquidity in the system, but they'll move very cautiously," said FleetBoston Financial chief economist Wayne Ayers.
That said, "If I were going to refinance my mortgage and I hadn't done so yet, there would be no point to waiting," said former Fed governor Lyle Gramley, who is now at the Mortgage Bankers of America.
The Fed cut its target rate that banks charge each other for overnight loans from 6.5 percent to 1.75 percent in 11 steps during 2001, in one of its most aggressive campaigns ever. A full 1.75 percentage points in cuts came after Sept. 11.
Many economists now see the target approaching 3 percent by year's end.
Most analysts expect the first jump to come at the Fed's meeting at the end of June, after holding rates steady in March and May. Earlier, analysts didn't see a Fed move until the end of 2002 at the earliest.
Recent data have been stronger than expected, however. On Thursday, the government said first-time applications for unemployment benefits fell last week, providing more evidence that layoffs are easing. Another report said retailers increased their inventories in January for the first time in a year, a sign that firms are expecting business to strengthen.
Fed Chairman Alan Greenspan said last week that the expansion was "well under way." With that in mind, the Fed will need to raise its target for interest rates soon to make sure the economy doesn't take off so fast it sparks inflation, economists say.
"They want to keep the economy growing moderately, not excessively," said Schwab Washington Research Group Managing Director Greg Valliere.
As the St. Louis Fed said recently, the central bank "must be on guard against waiting too long to remove the punch bowl at this year's economic recovery party."
Many analysts expect the Fed will take a step toward rate increases Tuesday by stating its biggest concern no longer is a weakening economy, a stance it has held for more than a year. Instead the Fed will take a "neutral" stance, suggesting the risks are evenly balanced between a weakening economy and inflation.
Economists who still think the Fed will wait until the end of the year to raise rates say the lack of inflation gives the central bank time to wait to see how the expansion plays out rather than risk derailing the recovery with tighter credit.
"The Fed is going to want to see enough solid growth in consumer spending and in capital spending to be comfortable with the notion that the economy can withstand the Fed taking some of the rate cuts back," said John Ryding, Bear Stearns chief market economist.
