Federal Reserve officials, buoyed by bigger-than-expected job gains Nov. 5, may leave their policy statement largely intact while raising interest rates tomorrow, adding to expectations for a boost in December, economists said. The 337,000 jobs added in October, the most since March, convinced more investors that the Fed will raise the benchmark rate next month as well as tomorrow, to end the year at 2.25 percent. Fed futures traders built in a 76 percent chance for a December rise after Friday's report, up from 48 percent Nov. 4.
``I would tend to think that they will not change the statement to imply a pause,'' said William Dudley, chief U.S. economist at Goldman, Sachs & Co. ``What they might do in the statement is make it clear that it's data dependent.'' The Fed is balancing concern that record oil prices will spur inflation, a reason to raise rates, against signs that the economy is slowing, a reason to keep them low. Economists cut forecasts for fourth-quarter growth to 3.5 percent from 3.8 percent in the latest Bloomberg News monthly survey, published today. The third-straight decline comes amid concern that energy costs will stifle consumers' ability to spend. All 88 economists in a separate Bloomberg survey expect the rate-setting Federal Open Market Committee to raise the benchmark overnight lending rate a quarter-point to 2 percent tomorrow. The decision is expected about 2:15 p.m. Washington time. The outlook for December is less certain, with 29 of 58 forecasting an increase.
Economists including Dudley, James Glassman at JP Morgan Securities Inc. and former Fed Governor Susan Phillips said they expect the FOMC to keep language that it can raise rates at a ``measured'' pace. Policy makers had used the language since May, a month before their first inc rease, and Friday's jobs report gives them little reason to back off that now, economists said.
`Measured Pace'
There's ``probably not a lot of change that needs to be done'' to the statement other than reflect the improving jobs outlook, Phillips said in an interview. Only 15 economists were predicting a December increase until Friday's jobs report, which rose almost twice as much as the median forecast. With revisions higher to the previous two months data, the economy created an average 225,000 jobs a month since August, the Labor Department said. ``If businesses continue to hire at this pace, then another move in December seems necessary,'' said Mark Spindel, chief investment officer at International Finance Corp., an arm of the World Bank, who manages $13 billion in debt securities.
December Rate History
A December rate increase would be unusual, even with the pickup in job growth and signs that some companies are able to raise prices. In the past two decades, the FOMC increased rates in December just twice, in 1988 and 1986 -- skipping even tightening cycles in 1994 and 1999. The panel cut rates in December seven times since 1984, most recently in 2001. The Fed raised its target rate a quarter point at the last three meetings after leaving it for a year at 1 percent, the lowest since 1958, to spur growth and avoid deflation. Fed officials including Federal Reserve Bank of St. Louis President William Poole said the Fed is aiming to bring rates back to a ``neutral'' level that neither stimulates nor restrains growth. A neutral rate may be lower than the 3 percent to 5 percent band once estimated, economists said. Brian Sack, senior economist at Macroeconomic Advisers LLC in St. Louis and a former section chief at the Federal Reserve Board's division of monetary affairs, estimated the neutral rate might be below 2.75 percent because of the impact of high oil prices.
No `Forced March'
Fed officials including Janet Yellen and Vice Chairman Roger Ferguson suggested in recent speeches that the Fed won't necessarily raise rates at each meeting. ``It seems clear that the fed funds rate will need to rise as we go forward, but the pace of that increase will need to be closely linked to unfolding events,'' said Yellen, president of the San Francisco Fed Bank, in an Oct. 21 speech. Rate increases won't be a ``forced march,'' Ferguson said Oct. 29. ``We should remove the current degree of accommodation at a pace that is importantly determined by incoming data and a changed outlook,'' he said. Economist Christopher Low at FTN Financial in New York said he considers Ferguson to be a protege of Fed Chairman Alan Greenspan and ``my sense is that probably he wouldn't say it if Greenspan wouldn't share that belief.'' Investors have come to interpret ``measured'' to mean the Fed will raise rates at each meeting, said Louis Crandall, chief economist at Wrightson ICAP LLC. ``It is interesting that measured was seen as a promise to move slowly. Now it has come to take on the `relentless' overtone. I think they might be able to find ways to go back to that earlier meaning.''
Oil Prices
Crude oil futures prices sank below $50 a barrel in the past week after peaking at $55.67 on Oct. 25. prices still remain up about 50 percent this year, and the Fed's survey of regional economies through mid-October said more companies were able to pass on some of those higher costs to customers. Benton Harbor, Michigan-based Whirlpool Corp. said Oct. 20 it would raise worldwide prices 5 percent to 10 percent after steel prices more than doubled this year and oil prices rose. Peoria, Illinois-based Caterpillar Inc., which also uses steel to produce construction equipment, raised prices twice this year on earthmovers and plans a 3 percent boost in January, Chief Financial Officer Lynn McPheeters said. ///www.bloomberg.com