September Fed Hike Seen: Analysts

Tue Aug 10, 2004
By Victoria Thieberger

NEW YORK (Reuters) - The Federal Reserve's resolute downplaying of the recent weakness in the U.S. economy suggests policy-makers still plan to continue raising interest rates in September, economists said on Tuesday.

Some analysts had thought the Fed would give more credence to the recent slowdown in consumer spending and job growth.

Instead, as it raised the federal funds rate for the second time this year, the Fed said the economy was poised to resume stronger growth.

"They are going to stick with their plan" for steady rate increases, including at the next meeting in September, said Kevin Logan, senior economist at Dresdner Kleinwort Wasserstein.

But the Fed blamed the recent weakness on high energy prices, which show no signs of easing. U.S. crude oil hit a fresh record on Tuesday of $45.04 a barrel and could continue to weigh on consumer spending and business outlays.

"They might think this is a temporary adjustment as people adapt to higher energy prices, or they might think oil will fall back. But they don't know that," Logan said.

Futures markets slightly increased the chances of a rate increase at the Sept. 21 policy meeting, but were not wholly convinced by the Fed's hawkish tone.

Fed funds futures were pricing in a 68 percent chance of another rate rise in September, but economists said much depends on the August payrolls report showing a convincing bounceback after minimal growth in June and July.

LOOKING AHEAD

Henry Willmore, chief U.S. economist at Barclays Capital, said the Fed's added statement that the economy appeared "poised" for stronger growth was intended to suggest another rate hike was on the way in September.

"It seemed somewhat designed to throw cold water on the idea they're not going to go in September," Willmore said.

Fed officials have said they are uncomfortable with official borrowing costs so low -- just 1.50 percent after Tuesday's hike -- in a growing economy.
But a raft of soft economic news in recent weeks raised worries that the summer doldrums could persist into the fall. The Fed's optimism on Tuesday seemed designed to dispel such concerns.

"The market was expecting more wiggle room from its measured pace in raising rates. This is a relatively resolute statement," said Richard DeKaser, chief economist at National City Corp.

The Fed -- which does not meet in October -- is also thought likely to raise rates again at its November meeting, right after the U.S. presidential elections. But doubts remain over the economy's ability to shrug off the shock of persistently high oil prices.

"I'm not 100 percent convinced by their optimism, given that the energy prices are remaining strong. But that's what they're saying," said David Sloan, economist at 4CAST Ltd.

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