THE FEDERAL Reserve Board has raised interest rates twice this year to cool the economy and keep inflation from rising. This week, the Fed's interest rate-setting body -- the Federal Open Market Committee -- wrestles with the question once again. Will the Fed raise interest rates? If it does, what is the impact on the economy and the stock market?
Chief economist, Standard & Poor's DRI, Lexington, Mass.
I am in the tightening camp. I think they are going to move. You look at the economy, and you look at 4.8 percent growth last quarter, and 4.1 percent unemployment -- and you have got commodity prices that are going up.
Raising rates seems safer than not raising them. You don't want to do it in December because you are staring Y2K in the face.
The next time you could raise them is probably March. It is a long time to wait, especially if you might have to do more than one rate hike.
If you don't start until March, pretty soon you are in an election season. The Fed likes to keep its head down in an election season; they don't want to appear political.
If they raise rates, most of the people in the bond market feel this will be the last one, at least until spring. They have been expecting an increase, frankly. I don't think the bond market will move very much.
The economy looks so darned strong right now, I don't think a quarter of a point is going to do anything to it either. You might get a little drop in the stock market.
Joseph V. Battipaglia
Chief investment strategist, Gruntal & Co., New York
Generally, the bond market and the stock markets are expecting a quarter of a point increase. I am not because I am looking at the same data they are looking at and I am concluding that the economy is doing well, but certainly not accelerating.
Price levels in the real economy haven't changed all that much. Certainly, you don't get a hiccup in the stock market either way. I would still think you might hit 12,000 on the Dow this year, although it is getting a little tight.
Hugh A. Johnson
Chief investment officer, First Albany, Albany, N.Y.
The odds have been changing every week. [On Oct. 27], seven of 10 economists thought the Fed would raise rates. [On Nov. 3,] it dropped to four of 10, and [on Nov. 10] it was five of 10.
If you are leaning on economists to make your decisions -- you won't get any direction.
My inclination is lean with investors and conclude that the Fed will raise a quarter of 1 percent. I think it [a rate increase] is already reflected in the financial markets.
I'd be inclined to believe that it would be a surprise if the Fed did not raise rates. That would lead to a rise in stock prices and a rise in bond prices as a sort of small celebration.
If I am wrong, I can assure you this will not mark the first time I have been wrong.
J. Patrick Bradley
Director, economic and investment research, Mercantile-Safe Deposit & Trust Co.
I am a lot less certain than I was two weeks ago. Two weeks ago, [Oct. 27] I would have said they are definitely going [to raise rates].
My rationale for them going was the economy is still relatively strong. We are still growing at a rate faster than I think the economy is capable of growing without generating some inflationary pressures.
With that being said, look at the average hourly earnings in October. They were up a penny. We have a fairly tight labor market, and you have got to go all the way back to January 1970 to find a lower unemployment rate. It seems to me that there are some smoldering inflationary pressures out there.
When you get to this kind of tightness in the labor market, wages rise and the higher wages are passed along in higher prices to consumers, and inflation picks up. If you look at wholesale prices, inflation has picked up. Part of that is energy; part of that is steel scrap, unleaded gas, crude oil; copper is up over the past three months.
I have got some concerns and I think the Federal Reserve has some concerns that they want to prevent any inflation from picking up. My sense is -- that they can raise by 25 basis points.
Money market economist, Morgan Stanley Dean Witter, New York
It is really a tough call at this stage of the game.
They argued for a tightening back in October and nothing much has changed this time around. That is why there may not be any immediate danger of inflation rearing its ugly head.
If the Fed wants to stay ahead of inflation, they should probably raise the federal funds target by a quarter of a point.