Breaking ranks with most economists, Robert Brusca of Nikko International in New York is predicting that the Federal Reserve will raise interest rates a full percentage point this year.
"The Fed is going to have to do something to slow the economy down," Mr. Brusca said at an economic briefing Tuesday morning. What's more, he predicted, the first 50 basis points of that increase could come as soon as this quarter.
"If you want to have an impact and want to slow the economy down, you hit it with the big stick first," said Mr. Brusca. He argued that low unemployment, rising wages, and declining productivity would prompt corporations to raise prices and that the Fed would respond by trying to quell price inflation with rate hikes.
Rising rates could hurt bank earnings, especially for companies with asset-sensitive portfolios. Such banks' earnings are vulnerable if the rates they must pay to raise money rise faster than the rates they receive on loans and other assets.
Most observers foresee a relatively stable rate environment. But Mr. Brusca said the economy is growing faster than many people think and money supply growth is picking up.
"I'm not worried about a big inflation coming," he said, "but we have some creeping inflation."
He also said "weak foreign growth has kept inflation low" but that "recovery is long overdue" in foreign markets.
In contrast to economists who believe the consumer price index overstates increases in the cost of living, Mr. Brusca said a revision last year makes it "probably two-tenths lower than it otherwise would have been."
By the new measurement, Mr. Brusca said, overall CPI rose 3.3% year- over-year. "But it really went up 3.5% by historical standards," he said. "We may be deluding ourselves into thinking inflation is better when it's really not."