Forecast: Federal Funds Rate At 3% By Yearend 2005

By John S. McClenahen There are just over two months left in 2004, but Global Insight, a Waltham, Mass.-based economic forecasting firm, is looking to the end of next year and sees the influential federal funds target at 3%. The rate, which is the interest banks charge each other on overnight loans, is now 1.75% and it's generally expected that the Federal Open Market Committee will raise the rate to 2% at its Nov. 10 meeting. Global Insight previously had forecast a federal funds target rate of 3.5% by the end of 2005. "During 2005, we expect the Fed to tighten [the money supply] gradually, but to move more deliberately than previously expected," says the economic forecasting firm. The major reason for its downward revision: slower GDP growth the originally expected. It's now forecasting 3.5% real growth (at annual rates) in the first and second quarters of 2005, 2.9% in the third quarter, and 2.6% in the fourth quarter.

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