NEW YORK - U. S. interest rates will probably rise in the second half of 1991 as the economy shifts into recovery and the Federal Reserve moves to ward off inflation, economists said.
"We look for a general trend toward higher rates over a six-month horizon," said Robert DiClemente, senior economist at Salomon Brothers Inc.
But there was some variation among analysts' ideas on how much rates would rise and which rates would move up.
Rate of 6% or Higher
Most see some tightening in the federal funds rate as the economy begins to expand. Some analysts say the Fed will push the fed funds rate up to present a tough anti-inflation stance, with the rate rising to 6% or 6.25% by yearend from the current 5.75% target.
The rise would mark the end of a year-long easing cycle that began July 13, 1990, when fed funds fell to 8% from 8.25%. "Usually in the early stages [of recovery] the Fed is on hold, but this is the Fed that has prided itself on its anti-inflationary zeal," said Robert Dederick, chief economist at Northern Trust Co., Chicago.
Mr. Dederick projects a 6% federal funds rate by yearend.
Most analysts see no change in the discount rate of 5.5% Mr. Dederick said that although he expects a rise for fed funds by yearend, he does not look for an increase in the discount rate or in banks' prime lending rate, now at 8.5%.
Economists noted that when the Fed begins to tighten, increases in the discount rate typically lag increases in fed funds, as has been the case after past recessions. After the last major trough in November 1982, fed funds began their upward trek 13 months before the discount rate.
But Bank of Boston Corp.'s chief economist, Wayne Ayers, said the prime could hit 9% if fed funds are at 6.25% by yearend.
"The prime is pretty sluggish on the way down, but not on the way up," Mr. Ayers observed.
Bill Rates Could Edge Up
Most economists estimate short-term Treasury bill rates will rise pretty much in line with increases - or expectation of increases - in the funds rate. Mr. Dederick looks for a mild increase in short bill rates, possibly of 25 basis points, if it appears likely the Fed will push up funds.
But Kevin Logan, chief economist at Swiss Bank Corp, sees short-term rates up as much as 100 basis points by year end.
Mr. Logan's forecast would put three-month rates at 6.75%.
Analysts said the Treasury's 30-year bond rate, now at 8.43%, may back up a bit, but most expect a temporary rise.
Later Decline Seen
Mr. DiClemente, who said long-term rates could hit 9% by yearend, noted low inflation, some tightening of funds and a tepid rebound will likely pave the way for long rates to come back down again. "Longer-term considerations suggest that any rise in long rates is likely to be more of a spike than the start of a lasting trend," he said.
He looks for retail inflation of about 3.3% on an annualized basis in 1991, creeping up to 3.5% in 1992.
Most analysts said if long-term rates edge up, mortgage rates could follow. The average 30-year fixed-rate mortgage is currently at 9.67%.
Still, some economists expect the trend in rates to be down over the next six months. They argue the economic rebound will be much slower in getting under way than most expect.
"I am not convinced the evidence we've seen so far signals the start of a recovery process, which leaves the door open, at least for a while, for lower rates," said Henry Engler, economist at Chemical Banking Corp. He said there is a chance the Fed might push funds down one more time, to 5.50% in the third quarter.