Interest rates are headed up next year, according to economists contacted for the latest American Banker yield and rate survey.
The view of half the 10 business economists is that the Federal Reserve will probably have increased short-term rates at least one-quarter percentage point by this time next year.
A couple think the central bank may need to ratchet up rates by a half or even three-quarters of a point to brake the economy and subdue the inflationary potential of a tight job market.
"The Fed almost always has to go further than expected to get the job done," said Kenneth T. Mayland, chief economist at KeyCorp, Cleveland. "And we have a lot of economic momentum right now."
The rising-rate scenario presumes that Asia's financial crisis will not slow the U.S. economy enough to offset the wage pressures being generated by a 4.6% unemployment rate, the lowest in a generation.
Mr. Mayland said he thinks the federal funds rate, which is charged for overnight loans of bank reserves, will be 6.25% by the fourth quarter of 1998, up from the current target of 5.5%. BankAmerica Corp.'s chief economist, John O. Wilson, said he expects a half-point increase, to 6%.
Others, like William Dudley of Goldman, Sachs & Co., said they think the Fed may only tighten credit conditions a single notch, or one-quarter point, while five of the 10 contacted think the central bank will stand pat on rates next year.
"I think the Asian impact will turn out to pretty small, around a quarter percentage point of GDP," Mr. Mayland said, "and I wonder if it will even measure up to that."
"We're seeing lower bond yields today because of Asia," he said. "That probably means we will build a few new homes and sell a few more new cars- and these are offsets to any slowdown effect."
People will have more discretionary income, he suspects. "Having to spend a little less next year buying a Sony VCR made in Malaysia, means having a little more to spend going to the movies or the mall," he said.
"Any resources released are going to be readily snapped up elsewhere in an economy that the Fed might well describe as beyond full employment," Mr. Mayland said.
Indeed, 1998 will be "a dicey year" for the Fed, said Wayne M. Ayers, chief economist at BankBoston Corp.
"To be sure, we expect the economy to slow over the course of the next year," he said. "But unless this slowdown is evident sooner rather than later, we expect the Fed will be forced to risk a modest uptick in rates in early 1998."
But others are not as sanguine about the economy's vigor.
"Despite U.S. economy's recent solid advance, other factors will far outweigh the current economic strength," said John Lipsky, chief economist at Chase Manhattan Corp.
In a revised 1998 forecast titled "Good-Bye Goldilocks," Mr. Lipsky said he expects U.S. economic growth to slow to little more than 1% and consumer price inflation to drop to about 1.5%, raising chances that the Fed will reduce-not raise-rates.
The title of his forecast refers to the well-balanced business conditions of recent years. Economists labeled this the Goldilocks economy- not too hot and not too cold.
"The 1998 outlook represents the end of the Goldilocks phase of the U.S. expansion," Mr. Lipsky wrote, "encompassing solid growth in output and profits, high rates of capacity utilization, plus low and stable inflation."
"Superseding the Goldilocks economy," he said, "will be a more conventional combination of sluggish growth, modestly rising unemployment, and falling inflation."
At the same time, Mr. Lipsky warned, his outlook is subject to change because "the Asian outlook remains highly uncertain and could turn out to be more troublesome than has been assumed."