Merrill Expects More U.S. Monetary Tightening

Merill Lynch & Co. still expects the Federal Open Market Committee (FOMC), the 12-member panel headed by Alan Greenspan, that sets U.S. monetary policy, to finish tightening the money supply this summer. But the New York-based investment firm now suggests it could be August rather than May before the FOMC completes its work.

The influential federal funds target rate, the interest banks charge each other on overnight loans, is now at 2.75%; Merrill sees it topping out at 3.5%.

There are two possible scenarios, Merrill says, for getting there from here. In the first, the FOMC raises the federal funds target rate 25 basis points at its next meeting on May 3 and then 50 basis points on June 30. In the second scenario, the FOMC raises the federal funds target rate 25 basis point at each of its three upcoming meetings: May 3, June 30 and August 9. "Either way, this tightening cycle will have been 12-24 months long, which is right in line with the long-run average, in terms of duration," notes David A. Rosenberg, Merrill's chief North American economist.

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