FOMC Likely To Raise Funds Rate In February

Jan. 14, 2005

In an economic data dump on Jan. 14, the U.S. government reported that manufacturing output rose 0.7% in December 2004, the overall Producer Price Index (PPI) fell 0.7% in December while the core-PPI advanced 0.1%, and business inventories rose 1% in November.

None is likely to dissuade Chairman Alan Greenspan and his 11 voting colleagues on the Federal Open Market Committee (FOMC) from raising the influential federal funds target rate by 25 basis points at their next scheduled meeting on Feb. 1 and 2. That would take the target rate, now 2.25%, to 2.5%.

Indeed, the FOMC could keep raising the target at a "measured" pace for its next several meetings, believes Merrill Lynch & Co. The New York-based securities firm is abandoning its forecast that the FOMC would raise the federal funds target rate on Dec. 14, 2004, and then be done for a while.

Merrill now believes the FOMC will raise the federal funds target rate by 25 basis points at each of its next four meetings, starting in February. If that happens, the federal funds target rate would be 3.25% by the end of June; a full percentage point higher than it is now. The federal funds rate is the interest banks charge each other on overnight loans. Among the reason for Merrill's change in forecast: the "hawkish" tone of the minutes of the FOMC's Dec. 14 meeting, the firm says.

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