With the likelihood of higher interest rates suddenly stronger, bankers will be keenly watching Tuesday's meeting of the Federal Reserve's monetary policymakers.
Signs from Chairman Alan Greenspan and other members of the central bank's open market committee have recently been so clear that many economists would now be surprised if the Fed did not act to slow the economy and head off inflation.
"The chances they will move are now two-thirds versus one-third," said A. Gary Shilling, an economist and money manager.
"I don't know at this point what the arguments are to wait," said James W. Coons, chief economist at Huntington National Bank, Columbus, Ohio. "The question for bankers is how far they will go."
While a quarter-point increase in the federal funds rate would have minimal impact, the Fed typically moves several times after it changes policy. Bankers appear to be bracing themselves.
"Banks are certainly going to lose a borrower or two on the fringe," noted Robert B. Engel, executive vice president and chief credit officer at Marine Midland Banks Inc., Buffalo, a subsidiary of HSBC Holdings PLC. "The higher rates get, the greater impact they will have on bank underwriting sensitivity.
"If there are a series of bumps, lenders could pull in their horns and tighten their underwriting standards," Mr. Engel added. Ultimately, it would affect "the capacity that small businesses have to borrow."
But Kenton A. Thompson, executive vice president and manager of the middle-market segment at KeyCorp, Cleveland, said the effect of rate hikes could be muted. "It's definitely going to have an impact on customers because a large part of consumer and business debt is tied to the prime rate," he said.
But Mr. Thompson added that successive rate hikes over the next few months may not have as big an impact on businesses as they have in past years.
"Before, when interest rates went up, businesses were caught with a lot of inventory and high receivables. We're not seeing a lot of that this time," he said.
If the Fed moves it will most likely be a quarter-point, but that should be seen as "a down payment" on future moves, said Charles Lieberman, chief economist at Chase Securities Inc., New York, a unit of Chase Manhattan Corp.
Indeed, history shows that the Fed usually tightens credit until a recession results, noted Mr. Shilling, who heads A. Gary Shilling & Co., Springfield, N.J. The economic "soft landing" of 1995 after the last round of Fed rate hikes, throughout 1994, was the exception, he said.
Mr. Coons said arguments for the Fed to defer action now on a rate hike, pending additional economic information, may have gone out the window when the most recent measurement of the consumer price index arrived last week. Prices rose 0.3% in February.
"The latest CPI was nothing at all to write home about," he said. "That's around 3.5% inflation when you annualize." That would be up from annual inflation of around 3% the past few years.
Some economists have fretted for months that a low unemployment rate had created the sort of tight job markets that raise labor costs for business. They believe that the low unemployment rate ultimately means inflation will rise.
Views on rates have shifted quickly as revealed by the new "Fed Trigger Index" being compiled at Comerica Inc., Detroit.
The index, a monetary model based on inflation expectations, now shows a 51% probability that the Fed will tighten. That is a sizable jump from the 32% likelihood of a rate increase when the banking company's economists introduced the index March 6.
The most notable factor in the changed sentiment is the shift in tone of Mr. Greenspan's public remarks since last fall. Last week he told the Joint Economic Committee of Congress: "We stress the importance of acting promptly-ideally preemptively-to keep inflation low."
If he is now more inclined to act, the Fed chairman would have several strong allies, while some regarded as possibly more willing to wait have either left the Fed or been relatively quiet.
Lawrence H. Meyer, appointed to the Fed last year, is likely to take a more prominent role. He is seen as supporting early action against inflation and recently has expressed concern about tight job markets in a strong economy.
"There remains some uncertainty as to whether the current unemployment rate will prove consistent with low inflation," Mr. Meyer said in January. In that speech, he gave prominent attention to the Phillips Curve theory in economics, which holds that the inflation rate is dependent on the level of employment.
Another anti-inflation hawk with greater prominence is Robert T. Parry, president of the Federal Reserve Bank of San Francisco. Mr. Parry is a voting member of the open market committee this year, in accord with the rotation of district bank presidents on the committee.
Last week, Mr. Parry repeated his strong views in a speech in Germany that was prepared before the CPI release.
"Given the risks and the timing issues," he said, "it will be especially important during this period to be keenly alert to any signs of increases in inflation pressures-indeed, we must be ready to act to head off increases in inflation before they begin to show up in the inflation data."