More Interest Rate Talk from Bloomberg:
quote.bloomberg.com
Top Financial News
Wed, 17 May 2000, 5:49pm EDT
U.S. Economy: Fed's Overnight Rate Seen Rising to 7% (Update1)
By Michael McKee and Vince Golle
Washington, May 17 (Bloomberg) -- U.S. interest rates,
already at their highest levels in nine years, may rise another
half percentage point or so before the economy slows enough to
satisfy the Federal Reserve, according to a survey of business and
financial analysts.
The Fed boosted the overnight bank lending rate by a half a
point to 6.5 percent yesterday, the sixth increase in the past 11
months. Yet economic growth is still running close to 5 percent
this year, and there are few signs of an imminent slowdown.
``Consumers have basically shrugged off all the Fed
tightening so far,'' said David Jones, chief economist at Aubrey
Lanston & Co. in New York. ``Nobody feels any pain yet.''
That helps explain why the overnight rate may rise to 7
percent before the central bank is finished, according to the
median estimate in a Bloomberg News survey of 52 economists. That
would boost borrowing costs for businesses, credit cards, cars and
mortgages by about the same amount to levels not seen for a decade
and slow the U.S. growth rate to about a 3.5 percent pace, the
economists forecast.
After four consecutive years of growth above 4 percent, it's
getting harder for companies to meet consumer demand, and Fed
officials worry that shortages of goods and services are leading
to higher prices. The consumer price index is up by a third over
last year, while anecdotal evidence of rising prices is piling up.
Inflation will likely continue to accelerate until growth
slows, the analysts said, which means rates will keep rising for
the foreseeable future. ``Inflation psychology has begun to
shift,'' said David Orr, chief economist at First Union Corp. in
Charlotte. ``Further rate hikes are part of the Fed's inflation
game plan.''
Prime Rate Rises
Most U.S. banks raised the prime rate charged on loans to
their most credit-worthy customers to 9.5 percent after the Fed's
move. That's the highest since early 1991, and should trigger
higher rates for most other borrowing as well.
Still, analysts say it's unlikely to have an immediate effect
on consumer spending. The Fed's move yesterday will cost the
average American only about $39 a month, according to analysts at
Bankrate.com who compared average interest rates on a $100,000 30-
year mortgage, a $15,000 four-year car loan, and a $2,000 credit
card balance paid off over five years.
With unemployment at 3.9 percent, the lowest in 30 years,
that's not much of a deterrent to spending. Average hourly
earnings rose 4.5 percent during the first four months of the
year, the fastest rate of growth in two years.
``It's really tough to hold down consumers when the job
picture is so good and improving,'' said Diane Swonk, chief
economist at Bank One Corp. in Chicago. ``That generates
tremendous confidence that they can spend and still pay their
bills.''
Auto, Home Sales
It's a big reason auto sales, among the most rate-sensitive
parts of the economy, are still rising. Helped by discounts and
new models, car and truck sales are on pace to reach a record 18
million this year, auto companies reported this month.
``While customers financing their vehicles through banks and
credit unions will see slightly higher rates, auto company finance
entities will likely continue to offer attractive below-market
rates -- from 2 percent to 8 percent,'' said Paul Taylor, chief
economist at the National Automobile Dealers Association.
Existing home sales rose in two of the first three months of
the year, even though Freddie Mac reported the interest rate on a
30-year fixed-rate mortgage rose last week to 8.52 percent, the
highest in more than five years.
``When interest rates start to get high, people tend to
switch from 30-year fixed-rates to adjustables and still get a
reasonable rate,'' said Mark Crivelli, president of the mortgage
unit at Kaufman and Broad Home Corp., the country's largest
homebuilder. The Mortgage Bankers Association reported today that
ARM applications last week were up 96 percent over the same week a
year ago.
``Demand is so strong today that rates could go to 10 percent
or 10.5 percent without a hit to the housing market,'' said Neil
Bader, president of New York-based mortgage firm Skyscraper
Mortgage.
Business Investment
It's not just real estate. Companies across the economy are
continuing to spend. Economists at Bear Stearns in New York
estimate business investment rose 14.5 percent in the first
quarter.
Some of the analysts in the Bloomberg survey see that as
another complicating factor for the Fed. ``Companies are finding
it really pays off to invest in technology,'' Swonk said. ``But as
productivity increases and returns on capital rise, the Fed is
chasing ever higher growth.''
Swonk and the analysts at Bank One said the Fed will have to
raise the benchmark rate to 9.75 percent or higher in order to
stay ahead of inflation. That's the high in the Bloomberg survey;
one analyst predicted the Fed will stop now. Swonk said that's
ridiculous.
``We don't know where real interest rates should be, but to
think a half percentage point or full percentage point increase
would stop an economy like we have today isn't feasible,'' she
said. ``People underestimate the momentum of an economy where real
wages are rising.''
Election Year Pause?
The majority, however, see the Fed stopping well short of
that. Real rates, or interest rates minus core inflation, are now
at 4.3 percent, ``already higher than when the Fed stopped
tightening in 1994,'' said Gary Thayer, chief economist at A.G.
Edwards & Sons in St. Louis.
It's possible the Fed may pause its series of rate increases
after policy-makers meet in August to avoid becoming a campaign
issue. ``On balance the Fed would rather not go right before an
election or right after,'' said Ethan Harris, a senior economist
at Lehman Brothers Inc.
Lehman's analysts say the Fed can stop at 7.25 percent, ``but
if GDP growth doesn't look like it's headed toward 4 percent and
if core CPI is significantly above 2.5 percent, the Fed continues
in play'' after November, Harris said.
Joseph Lavorgna, chief economist at Deutsche Bank Securities,
said rates won't stop rising until the Fed is convinced the
inflation danger is past.
``The story is that the economy is real strong,'' he said.
``The Fed itself doesn't know itself how far it has to take
interest rates.''
Bloomberg Survey
Firm Overnight Rate When Desired Overnight
Rate Hikes End Growth Rate Rate in June
------------------------------------------------------------------
Number of replies 52 49 52
MEDIAN 7.00 3.5 6.75
AVERAGE 7.15 3.3 6.73
High Forecast 9.75 4.0 7.00
Low Forecast 6.50 1.5 6.50
------------------------------------------------------------------
ABN-Amro, Inc. 7.50 3.5 6.50
A.G. Edwards & Sons 6.75 3.0-4.0 6.50
ASB Capital Management 8.00 2.0-2.5 6.75
Argus Research 6.75 3.0-3.5 6.75
Aubrey G. Lanston 7.00 3.5-4.0 6.75
Banc of America 6.75 3.5 6.75
Bank One 9.75+ 3.75 6.75
Bank of Montreal 7.50 3.0-3.5 6.75
Barclays Capital Inc. 7.00 2.5 6.50
Bear Stearns 6.75 3.5-4.0 6.75
Briefing.com 7.25 3.0 6.75
Carr Futures 8.00 3.5 6.50
Chase Securities 7.00 4.0 6.75
Chmura Economics 7.00+ 2.5-3.0 7.00
CIBC World Markets Corp. 7.00 3.0 7.00
Clear View Economics 7.00 2.0-3.0 7.00
Comerica Bank 7.00 3.5 7.00
Credit Lyonnais 7.00 3.5 6.75
Credit Suisse First Boston 7.00 1.0-2.0 6.75
Dain Rauscher Inc. 7.00 3.0-3.5 6.75
Daiwa Securities America 7.50 3.0 6.75
Deutsche Bank 7.00 4.0 6.50
DLJ 7.00 6.50
Dresdner Kleinwort Benson 6.75 3.5 6.75
Eaton Vance 7.00 4.0 6.75
First Tennessee Capital 7.00 4.0 6.75
General Motors Corp. 7.50 2.5-3.0 6.75
Goldman, Sachs & Co. 7.50+ 3.5 6.75
Greenwich Capital 7.00 3.5 6.75
GKS&T 6.50 3.0-3.5 6.50
High Frequency Economics 6.75+ 3.5-4.0 6.75
John Hancock Life Ins. 7.00 6.50
Lehman Brothers 7.25 4.0 7.00
LehrmanBell Mueller Cannon 7.00 2.0 6.75
Maria Fiorini Ramirez Inc. 7.25+ 3.5 6.75
MCM MoneyWatch 7.00 3.25 6.75
Merrill Lynch 6.75 3.75 6.75
Morgan Stanley Dean Witter 7.00 3.5-4.0 6.50
Naroff Economic Advisors 7.00 3.00 6.50
Nat. Assoc. Auto Dealers 3.5 6.75
Nesbitt Burns Securities 7.00 3.99 6.75
Northern Trust 7.50 3.75 6.50
PaineWebber 7.00 3.5 6.75
Paribas Corp. 7.00 3.0 6.75
Primark Decision Economics 7.00 3.5-4.0 6.75
Robert W. Baird & Company 6.75 3.0-4.0 Undecided
Salomon Smith Barney 7.50 6.50
Societe Generale 7.5 3.0 7.00
Standard & Poor's MMS 7.00 3.5 6.75
Thredgold Economic Assoc. 7.00 3.5-4.0 6.75
Tokai Bank 7.50 3.0 7.00
UBS Warburg 7.00 6.75
Wells Fargo & Co. 7.25 3.5 6.75
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