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Fed funds may hit 3.5% next year
Economists see Fed raising rates in June, boosting them threefold-plus in 18 months: report.
May 13, 2004: 7:23 PM EDT

NEW YORK (CNN/Money) - The Federal Reserve will raise a key short-term interest rate to 2.5 percent 12 months from now and 3.5 percent by the end of next year, a newspaper reported Thursday.

The Wall Street Journal said that 43 of 55 economists surveyed said they expect the central bank to raise its target for the federal funds rate, an overnight bank lending rate, starting in June, up sharply from a month ago when most economists surveyed said the Fed would raise rates in September.

Those surveyed predicted that the fed-funds rate would rise to 1.25 percent in June and hit 1.75 percent by December, 2.5 percent a year from now and 3.5 percent by December 2005.

"Monetary policy has been so accommodative for so long. They have to return to some kind of normalcy," Arun Raha, an economist with Cleveland manufacturer Eaton Corp., told the newspaper.

Economists were also quoted as saying the economy will handle the rate hikes well, though the report noted that the analysts have a long history of missing interest-rate moves.

In addition, they lifted their job growth estimates to an average of about 207,000 jobs a month over the next 12 months from an average 177,000 when polled last month.

Forecasts for growth in gross domestic product, the broadest measure of the nation's economy, were also revised up to 4.6 percent for the second quarter, from 4.5 percent estimated in last month's survey, the newspaper said.

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The Fed has kept the fed funds rate at 1 percent, the lowest in more than 40 years, as the central bank's policy-makers waited for the job market to pick up along with the rest of the economy.

According to the report, economists said Martin Feldstein, a Harvard economist and one of Ronald Reagan's economic advisers, was their top pick to replace Alan Greenspan as Fed chairman if Bush is re-elected, and that Robert Rubin, Treasury secretary under Bill Clinton, would take the job if Kerry wins the presidency.

Greenspan's term at the Fed expires in 2006 and he is ineligible for another.  Top of page




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