The outlook for interest rates remains muddled as bankers and investors await this week's gathering of Federal Reserve monetary policymakers.

The Fed's Open Market Committee will likely do nothing about rates at its midyear meeting, which begins Tuesday, but that will only increase apprehension on Wall Street about the rest of the year.

Half the economists questioned by American Banker in its latest survey think rates will be as much as half a point higher by yearend. Others expect no change while some anticipate lower rates.

Charles Lieberman, chief economist at Chase Securities Inc., a unit of Chase Manhattan Corp., said he sees "little chance" the Fed will raise rates this week but a significant likelihood of such action in August.

"Even if policy is not tightened in July," he said, Fed Chairman Alan Greenspan "will talk tougher" about inflation in his biannual Humphrey- Hawkins testimony to Congress on the economy.

That could help set the stage for action by the Fed at its next FOMC meeting in late August, when it will have full data on business conditions in the second quarter and a solid feel for the third quarter as well.

The Chase economist feels the economy has been expanding at an "above trend" rate, as especially shown by the growth in jobs. Nascent wage inflation will force the Fed to tighten credit, in his view.

By yearend, Mr. Lieberman said, he expects the federal funds rate to be 5.75% and banks' prime lending rate to be 8.75%, or half a point above their current levels.

"I don't think the Fed is in that big a hurry to raise rates," said Sung Won Sohn, chief economist at Norwest Corp., Minneapolis. "By waiting until Aug. 20, they will gain a lot more data, two more employment reports plus the second-quarter GDP figures."

Mr. Sohn, who expects the economy to cool off in the second half of the year, said he doubts the Fed chairman would lead the movement to a rate change this week, then have to defend it only a few weeks later in a congressional hearing without the additional data.

Finally, the Minneapolis economist said, the Fed will likely take its time because reversing the course of monetary policy from easing to tightening "is a pretty serious matter."

"Hiking rates as part of series of upward moves is one thing, but a new course immediately generates expectations in the financial markets of similar moves down the road," he said. "Bond rates will immediately jump."

The Fed eased rates three times during the past year. And some economists think business conditions will slow down enough in the second half of this year to let the Fed continue that trend.

"The Fed will probably not raise rates this summer and may well ease later in the year or in 1997," said economists David A. Levy and S. Jay Levy in their Industry Forecast newsletter.

They expect the rate on 90-day Treasury bills, currently around 5.05%, to "finish the year in the 4.50% to 4.70% range." The yield on the 30-year Treasury bond, now about 7%, "will fall to 6.25% or less," they wrote.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.