FOMC Set To Boost Fed Funds Rate

By John S. McClenahen Their statement won't come until about 2:15 p.m. on June 30, but there's virtually no doubt that Chairman Alan Greenspan and his 11 voting colleagues on the Federal Open Market Committee (FOMC) will vote to raise the federal funds target rate to 1.25%. The influential rate, the interest rate that banks charge each other on overnight loans, is now at 1%, a four-decade low. "With regards to inflation, the FOMC will acknowledge the recent rise in consumer price statistics but point out that inflation expectations appear to have remained well-contained," predicts Merrill Lynch & Co., New York. Over at UBS Investment Research, also in New York, economists expect the FOMC to go a bit further. However. "We believe the Fed will continue to characterize the likely tightening pace as 'measured,' with an added clarification that 'measured' is conditional on acceptable inflation." UBS figures the federal funds target rate will be at 2% at yearend 2004 and 4% at the end of 2005. In contrast, Merrill foresees 1.75% by the end of this year and the Fed stopping at a 2.5% to 3% federal funds target rate during 2005.

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