It wasn't too long ago that some of the best money on Wall Street was made by people who could divine what the Federal Open Market Committee had done with interest rates. They would watch moves in the fed funds rate and keep an eye on the discount window and be able to tell before anyone else when the Fed had moved. And they'd make a killing in the bond pit.
In February 1994, that changed. The FOMC decided to let the market know when it changed rates, and a whole lot of people's jobs became superfluous. And in the years that followed, the Fed got more open. So much so that it's pretty much a given that when the committee meets Tuesday, it will raise the fed funds target rate a quarter point to 6%, and it will say (and this is a direct quote), that it "believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."
Prognosticating on the Federal Reserve ain't what it used to be. Not that that's a bad thing.
"The Fed's come a long distance in the way they convey their policy changes," says Mickey Levy, chief economist at
Banc of America Securities
. "It's much healthier the way they do it now."
Economists at all 30 primary dealers (the firms that deal directly with the Fed) expect a quarter-point hike, according to recent polls. And most expect the Fed will keep on tightening until there are signs that the economy, which grew at a torrid rate of 6.8% last quarter, is cooling off.
"We are seeing an economy that shows very little signs of slowing down," says Dick Berner, chief U.S. economist at
Morgan Stanley Dean Witter
. "As a consequence, the Fed has more work to do."
But it is also unlikely that the Fed will raise rates at anything more than a moderate, quarter-point-by-quarter-point pace. Though energy prices are running higher, there's little evidence of inflation infecting prices of other goods.
"Only if we see clear signs of an uptick in inflation will they get more aggressive," says
director of U.S. economic research Bill Dudley. Greenspan's "not trying to kill anything."
Yet if there ever were an uptick in inflation, it would be a matter of grave concern. The major imbalance in the economy right now is the incredibly tight labor market. "We know that labor markets cause the slowest, most creeping inflation we get," says Diane Swonk, deputy chief economist at
. "Once it comes, it's also the hardest to get rid of."
Bearing that in mind, the Fed will probably stick to gradually raising rates until things cool.
"The risk in them tightening and trashing the economy is close to zero," says Don Fine, chief market analyst at
Chase Asset Management
. "The unemployment rate is at 4.1%. Nobody's hurting. There's very little cost in doing this now. And the cost of having inflation pick up unexpectedly would be tremendous."