Economists Predict a Minor Interest Rate Hike by Midyear

Most economists expect a modest rise in interest rates by the middle of this year, according to the latest American Banker Yield & Rate Survey. More than half the economists queried said they expect the Federal Reserve to lift a key short-term rate, the federal funds rate, by a quarter point, to 5.5%, from 5.25% currently. "I'm anticipating a slight mid-course correction, probably at the Fed's May meeting," said Wayne M. Ayers, chief economist at First National Bank of Boston, the flagship unit of Bank of Boston Corp. While the move itself would not be dramatic, the effect on the financial markets could be vivid, he noted. Currently, investors seem to be anticipating no near-term action by the Fed. Mr. Ayers said he sensed that Fed Chairman Alan Greenspan and other governors of the central bank had begun sending subtle signals of a rate move. "The rhetoric from the Fed has been very interesting, and not much different in some ways from late 1993," he said. In early 1994, the Fed began raising rates, as it explained then, to hold off incipient inflation.

Mr. Ayers said he expects nothing close to the doubling of the federal funds rate that occurred in 1994-95. "I expect 50 basis points or so in two moves," he said. Also watching the Fed's words closely is Kenneth Mayland, chief economist at KeyCorp, Cleveland. "In the latest minutes of their (monetary policy) meetings, they speak of not needing to make an anticipatory move yet," he said. "The key words for me are 'anticipatory' and 'yet.' " Mr. Mayland, too, said he now expects a rate move at the May 20 meeting of the Federal Open Market Committee.

The panel next meets in March but probably will continue to wait for more data from the first quarter, he said. Some economists think the Fed will be much further along by midyear. William Dudley of Goldman, Sachs & Co. sees a 6% fed funds rate; Dana Johnson of First Chicago NBD Corp. expects 5.75%. A few others think the Fed will continue in a holding pattern unless serious new developments warrant action. "The Fed hasn't changed rates in a year, even though the economy has accelerated, slowed, accelerated again, and now appears poised for another slowdown," said Nicholas S. Perna, chief economist at Fleet Financial Group Inc., Boston. Meanwhile, "inflation has been remarkably steady," he noted, and recent votes among Fed policymakers to leave rates untouched have been unanimous.

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