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Fed likely to raise rate a quarter-point
Updated: 2005-03-22 23:46

While mortgage rates and other interest rates are expected to keep rising in the United States this year, those increases are likely to continue at a gradual pace unless inflation becomes a threat.

But with oil prices surging to record highs, the worry about out-of-control inflation remains very real. Analysts said if policy-makers at the US Federal Reserve  grow concerned that inflation is becoming a problem, they are likely to start pushing up interest rates at a much more rapid clip.

More about the Fed's intentions was being revealed Tuesday when Fed policy-makers convene for their second meeting of the year.

It was widely expected that they would boost the Fed's target for the federal funds rate, the interest that banks charge each other, by another quarter-point. It would be the seventh quarter-point increase since the Fed started raising rates last June when the funds rate stood at a 46-year low of 1 percent. The funds rate is 2.50 percent.

If the Fed does boost rates by a quarter-point, commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, would rise by a quarter-point to 5.75 percent.

While a quarter-point rate hike was widely expected, analysts said there was more doubt about the wording the Fed will use to explain its actions.

The focus of attention is on the word "measured," which the Fed has used since it began boosting rates to signal that it intended to move rates higher at a gradual pace.

Speculation that the Fed might drop its pledge to move rates at a "measured" pace was sparked last month when Fed Chairman Alan Greenspan in congressional testimony did not use the word "measured" to describe the Fed's future intentions.

"The Fed is getting a little worried about inflation," said David Wyss, chief economist at Standard & Poor's in New York.

Some analysts said the Fed might modify the pledge to raise rates at a "measured" pace by adding some sort of qualifying phrase that would signal that the central bank was poised to start raising rates more quickly.

"Right now the economy is moving at a very good clip. If this continues, then the Fed will have to get more aggressive," said Lyle Gramley, a former Fed board member and now senior economic adviser at Schwab Washington Research Group.

Economists believe that the economy has been growing at a rate above 4 percent in the January-March quarter and employers added 262,000 jobs in February, the most in four months.

One development the Fed is watching very closely is the surge in energy prices. Crude oil prices hit a record in intraday trading of $57.60 per barrel last Thursday.

So far, the so-called core rate of inflation, excluding volatile energy and food prices, has stayed well-behaved at the retail level. But the core inflation rate at the wholesale level shot up in January at the fastest pace in more than six years.

Still, many analysts are looking for oil prices to retreat in coming months, helping inflation pressures to subside.

Some analysts said the Fed could stay with its measured pace of quarter-point moves for the rest of the year and, if it does, they don't see long-term rates, which are set by financial markets, surging either.

Rates on 30-year mortgages have been rising for the past five weeks and stand at 5.95 percent, according to a weekly survey by Freddie Mac.

Economist David Jones, the author of four books on the Greenspan Fed, said he believed 30-year mortgages would be around 6.5 percent by the end of the year, only a half-point higher than they are now.

Jones said he believed that the Fed will be content to push the fed funds rate to around 3.5 percent, meaning only three more quarter-point moves after this week. He said at that point, the Fed will feel it has achieved neutrality, the point where interest rates are not overly stimulating growth or depressing growth.

"I think the Fed is pretty satisfied with the path they have taken in moving in an orderly, measured way from a 46-year low for the funds rate to a point where they are approaching neutrality," he said.

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