Economists: Fed to Raise Interest Rates

from USAToday

The Federal Reserve will raise interest rates slightly more than expected, in response to brisk economic growth and continued inflation pressures, according to USA TODAY’s quarterly survey of top economists.

All 51 economists surveyed April 20-25 expect the Fed to raise its target for short-term interest rates by a quarter-point to 5% at its May 10 meeting. That’s a change from a January survey in which the economists predicted the Fed would pause after its March 28 meeting. Still, only about a fourth of the economists expect another rate increase at the following meeting, in June.

“All the data is pointing to a lot of momentum, and if (the Fed) wants to slow down the economy, why stop in May?” says Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, who expects the Fed to raise rates in May and June.

The central bank, as expected, raised rates in March to 4.75% from 4.5% to keep inflation under wraps.

Fully 62% of the economists termed Fed interest rate policy “just right,” 22% said it was too loose, and 16% said it was too restrictive.

A run-up in energy prices was seen as the biggest threat to the economy through the end of 2006, while concerns about a housing slowdown ran second.

“A lot will depend on how weak housing gets, in terms of whether we go into a real soft patch or not. That’s the key here,” says Nariman Behravesh of Global Insight.

Behravesh adds that if housing has a soft landing, the economy could sail through. If not, growth could slow, with the effects starting to be felt in the second half of this year and early 2007.

The median forecast of the economists was for second-quarter economic growth to proceed at a healthy 3.5% annual pace, a tick up from the January 3.4% prediction. Business spending is expected to be higher and inflation a bit stronger than earlier forecast. Consumer inflation is forecast at a 3.4% annual rate in the second quarter, from the previous 3.1% outlook.

Economists and the markets will have a better sense of the outlook today when Fed Chairman Ben Bernanke testifies before Congress.