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Fed's Work Remains Unfinished

Despite signs that employment and spending weakened in November, the Federal Reserve is likely to forge ahead with a quarter-point interest rate hike on Tuesday, its fifth in as many meetings.

In addition, central bankers are expected to leave their policy statement largely intact, suggesting that more hikes could be on the way in 2005.

Traders are almost fully pricing in a 25-basis-point move this week, which would leave the funds rate at 2.25%, up from 1% in June. The odds for a rate hike in February and March are also very high.

"I don't see anything to throw them off the path of steady, measured increases," said Alexander Paris, an economist at Barrington Research. "Interest rates are probably still too low."

With the economy growing at a respectable pace, Paris said there is no need for the stimulus that was put in place after the recession and terrorist attacks three years ago. Economists surveyed by Bloomberg News recently raised their estimates for fourth-quarter growth to 3.8% from 3.5%, citing a sharp decline in oil prices.

Paris also noted that the falling dollar has become a growing concern. In November, Fed Chairman Alan Greenspan said that if foreign demand for U.S. assets wanes amid a burgeoning trade deficit, interest rates would have to rise to attract foreign capital, or the country would be forced to import less.

Meanwhile, an article in The Wall Street Journal early this month suggested that some Fed officials are increasingly worried about inflation. Concerns center around high commodity prices, slowing productivity and the weak dollar, which raises import costs.

Still, Bill Dudley, an economist at Goldman Sachs, doesn't expect the Fed to change its assessment that the "upside and downside risks" to inflation are "roughly equal."

"My view is that it is premature to expect a change in the balance-of-risks statement," he said.

Indeed, inflation data have generally remained tame recently. In October, the core personal consumption expenditure index, the Fed's preferred measure of inflation, rose just 1.5% on a year-over-year basis.
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