August 13, 2005


Knowing When to Say 'When': Economists Expect Rates to Reach 4.5%,
But Will the Fed 'Overshoot' Its Target? (TIM ANNETT, August 11, 2005, THE WALL STREET JOURNAL ONLINE)

The Fed is expected to continue to move interest rates higher until the federal-funds rate, a key short-term rate that helps determine rates throughout the economy, reaches 4.5%, based on the median estimate of the 56 economists who were surveyed Aug. 5-9. Earlier this week, the Fed lifted the fed-funds rate by a quarter percentage point to 3.5%, the 10th such increase since last June.

On average, the economists expect the funds rate to be 4% by the end of 2005 and 4.25% by mid-2006. But some think that the Fed will go further -- and faster. Economists at Goldman Sachs, for example, believe the central bank will bring the funds rate all the way to 5% by the middle of next year.

Ethan Harris of Lehman Brothers Inc. worries that the Fed will overshoot, but he says that the problem is the central bank won't know if it has gone too far until it sees subsequent economic data. "There's a danger that the Fed will keep pushing the brakes until they finally work," Mr. Harris says.

Fighting inflation is the sole justification for the Fed and it raises rates and fiddles with money supply to try and fulfill that mission. However, it keeps raising rates whenever the economy is doing well on the mistaken assumption that growth must bring with it inflation. This has been wrong for over twenty years now but since there is no inflation for it to bring under control the only way it knows that the hikes have "worked" is when it brings growth to a halt. So it will keep raising until it slows the entire economy, as it did as recently as 2000-01.

Posted by Orrin Judd at August 13, 2005 6:03 AM
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