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Beware: No rate cut until 2008

Minutes from latest Fed meeting show the central bank, still worried about inflation, might stand pat through 2007.

By Paul R. La Monica, CNNMoney.com editor at large

NEW YORK (CNNMoney.com) -- Economists think it's looking more and more likely that the Federal Reserve will hold interest rates steady for quite a while, maybe through all of next year.

So investors hoping for a rate cut in 2007 may need to kiss that wish goodbye.

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ECONOMY FED FOCUS

"I think the Fed being on hold through 2007 is an entirely plausible scenario," said Chris Probyn, chief economist with State Street Global Advisors.

Members of the central bank's policy making committee indicated in minutes from last month's meeting, released Wednesday afternoon, that while they are still worried about inflation, they're also aware that a weak housing market may keep economic growth in check.

The Fed voted in last month's meeting to keep the fed funds rate, an overnight bank lending rate that influences rates on many types of loans, at 5.25 percent.

That was the third consecutive meeting that the Fed left rates unchanged after seventeen consecutive hikes from June 2004 through June of this year. But one of the central bank's policy-makers, Jeffrey Lacker, voted in favor of a rate hike at each of the Fed's past three meetings due to concerns about inflation.

Fed watchers said that as long as the economy continues to grow at a moderate pace, inflation will likely remain a threat. And that means that the Fed would not want to cut rates anytime soon. But with the housing market still showing signs of softness, a rate hike wouldn't be prudent either.

"It feels like the Fed is quite comfortable with the way things are going. It seems now that rates are pretty much in the sweet spot," said Oscar Gonzalez, an economist with John Hancock Financial Services.

Investors, however, still appear to be betting on a rate cut sometime in 2007. According to fed funds futures listed on the Chicago Board of Trade, contracts that expire in June 2007 have an implied fed funds target of 5.14 percent, lower than where rates currently stand.

But investors do seem to be aware that the chances of a rate cut are growing less likely. The June 2007 fed funds futures closed on Tuesday with an implied target of 5.075 percent - a sign that traders were betting more heavily on a rate cut before Wednesday's minutes were released.

"There's no reason to assume that inflation pressures will come down quickly so it's very unlikely the Fed will ease anytime soon," Probyn said.

On Wall Street, the Dow industrials rose to another record high, though stocks pared their gains after the Fed minutes came out as investors eyed the possibility that rate cuts may not materialize as soon as many had hoped.

Rate cuts tend to spur economic growth and corporate profits, thus lifting stock prices.

Still, one economist said it's too soon to say the Fed will stay on pause for all of 2007.

"There are a lot of economic releases coming out between now and the end of the first quarter," said John Norris, chief economist and senior fund manager with Morgan Asset Management.

The Fed's next meeting is set for Dec. 12, and the central banks' policy-makers have two meetings planned for the first quarter of 2007 - a two day session ending Jan. 31 and another that wraps up on March 21.

Norris said that if the pace of economic growth slows between now and early next year, the Fed should cut rates in the spring or summer.

"I would pound my table with a sledgehammer that the next move should be a down move. The Fed should have all the ammunition it will need by the end of the first quarter to cut rates," he said.

Fed: Inflation still 'greatest concern'

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.