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Fed to raise US rates again as Greenspan era ends

January 29, 2006

By Alister Bull

WASHINGTON (Reuters) – Fed Chairman Alan Greenspan will end
his 18-year rule on Tuesday with a rate hike of a quarter
percentage point and the message that borrowing costs may go up
again in March if warranted by growth and inflation.

Disappointing fourth quarter U.S. gross domestic product
numbers on Friday should not shake Federal Reserve confidence
the economy is on a reasonably solid footing, analysts said.

But higher core inflation shown in the data ought to ensure
that it retains a slight tightening bias, which markets bet
means one more rise before ending the current rate-hike cycle.

“The statement will continue the thrust that confidence on
their part is quite strong on economic fundamentals and they
place a higher risk on inflation,” said Lynn Reaser, chief
economist of Bank of America Capital Management.

Analysts also expect some adjustment to the Federal Open
Market Committee’s statement to indicate future actions will be
shaped by how the economy unfolds, which would also provide
some flexibility for incoming Fed Chairman Ben Bernanke.

“They must leave the slate clean for Bernanke. Giving the
impression that they are done (at 4.5 percent) would … extend
Greenspan’s tenure beyond January 31,” said Anthony Chan, chief
economist at JPMorgan Private Client Services.

A key phrase in the last FOMC statement was “some further
measured policy firming is likely to be needed” and 16 of 18
analysts polled by Reuters on Thursday expected this to be
modified, perhaps changing “is likely to” to “may” be needed.

“This would signal that they were near to the end of the
cycle,” said former Fed Governor Lyle Gramley, who put the
chances of another hike in March at 50/50.

The FOMC begins meeting at 9.00 a.m. EST (1400 GMT) and
will release its statement after 2.15 p.m. EST (1915 GMT).

All analysts polled by Reuters expect the U.S. central bank
to lift its target rate to 4.5 percent on Tuesday from 4.25
percent and 17 out of 21 thought it would go again at the
following meeting, on March 28, Bernanke’s first as chairman.

The statement will probably also be adapted to take account
of somewhat softer economic conditions since its last meeting,
on December 13, although this will likely be balanced by
expectations for a stronger start to the new year.

Preliminary fourth quarter GDP data showed the economy
slowing unexpectedly to just a 1.1 percent annualized pace,
from 4.1 percent in the previous three months and below the 2.8
percent forecast by Wall Street.

But analysts said this masked healthy underlying growth and
pointed to a rebound in 2006, which was a view also endorsed by
recent upbeat numbers on jobs and businesses investment.

They also thought the Fed would pay more attention to
inflation after the core PCE price index — the Fed’s favored
measure which gauges the prices faced by consumers — rose to
2.2 percent at an annualized pace from 1.4 percent.

This is above the preferred range of 1.0 to 2.0 percent
indicated by a number of FOMC members, including Bernanke when
he was a Board governor.

“Economic fundamentals do not make a compelling case for
the Fed to stop at 4.5 percent,” Lehman Brothers told clients
in a note. “Core PCE inflation accelerated in the fourth
quarter and on a quarterly basis is again running above the
‘Bernanke boundaries’.”


Source: reuters



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