The U.S. Federal Reserve will take another small step this week toward raising interest rates to more normal levels, but may be getting rates up to a point which allows for a pause in increasing them, analysts say. Fed officials gather on Tuesday and are widely expected to raise overnight borrowing costs, which influence rates across the economy, by a quarter-percentage point to 1.75 percent. It would mark the third small rate increase since the Fed began tightening monetary policy in June. While the U.S. economy lost some momentum in recent months, Fed policymakers have expressed confidence it has entered a self-sustaining expansion and no longer needs the ultra-low rates that were used to battle recession and a weak recovery.
"Our main direction is up," Fed Governor Susan Bies said last week. As Bill Cheney, chief economist at MSC Global Investment Management, puts it: "They'd like to take their foot off the gas pedal." When Fed officials last met on Aug. 10, they expressed confidence an economic soft patch would be prolonged and said they expected to continue raising rates at a measured pace. Since then, Fed chief Alan Greenspan has said the economy is already on firmer ground. "The most recent data suggest that, on the whole, the expansion has regained some traction," he told Congress. Markets are betting rates reach 2 percent by the end of the year, a forecast that implies the Fed takes a breather at one of its last two meetings of the year -- Nov. 10 or Dec. 14. Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis, said the December meeting would be a better time to "pause and look at the landscape." "Right now they will continue to raise interest rates," he said. "Number one: they believe the economic numbers justify it. Number two: in an election year it could send the wrong signal if they deviated from their task."
CHANGING GEARS
Indeed, while the Fed's post-meeting statement on Tuesday will be scrutinized for any sign of an impending pause, few Fed watchers expect to find one. In fact, economists say in many key respects the statement will likely mirror the one issued on Aug. 10, including the retention of the measured-pace language, which would be seen as signaling a rate hike was likely in November. "I don't think they've reached a point yet where they think they're even close to being done," Cheney said. "Unless there's some very dramatic (economic) change, they're going to take it at least as high as 2 percent" before any pause. The question increasingly is what happens then. "As long as you don't believe that moving slowly is going to derail the recovery, and I don't think they do, then ... they're going to want to stay focused on getting back to some normal level," said J.P. Morgan Chase economist Jim Glassman. In this case, normal means a level of interest rates that neither spurs nor restrains growth. Fed officials have given estimates of such a neutral rate that center on 4 percent, which implies the U.S. central bank may have plenty more to do next year. Economists are still trying to gauge what set of economic circumstances need to be in place for the Fed to pause in raising rates. "The hurdle for the data has to be reasonably high, given the low level of the fed funds rate. As the (rate) gets higher, that hurdle might decline," San Francisco Fed President Janet Yellen said earlier this month. William Dudley, chief U.S. economist at Goldman Sachs, said economic data will call the tune once rates hit 2 percent. "Fed officials will be looking out the window carefully once the federal funds rate gets to 2 percent," he told clients.///