Wall Street's top dealers said on Friday the Federal Reserve's new year's resolution is to boost
interest rates modestly in February, with chances rising for
more credit tightening by the summer.
In a Reuters poll, all 30 primary dealers of U.S. government
securities said they expect the Fed will push its key federal
funds rate up by a quarter of a percentage point to 5.75 percent
at its first meeting of the year on February 1-2.
Six firms have joined the call for a February rate hike
since Reuters' last polled primary dealers in late December.
They cited strong U.S. growth, as seen in the robust employment
report for December, that Fed policymakers will try to slow to
before inflationary pressures build.
Twenty-seven of the 30 firms that deal directly with the
Federal Reserve Bank of New York in U.S. markets also said they
see the fed funds rate at 6.00 percent or higher by the end of
That's up from only 22 dealers looking for more tightening
in a poll taken immediately after the Fed's Dec. 21 meeting.
"We look for a tightening of 25 basis points in February
because the U.S. economy is growing above its trend potential
and the Fed is clearly uncomfortable with that," said William
Dudley, chief U.S. economist at Goldman Sachs.
On Friday, news that 315,000 new jobs had been created
outside the farm sector in December merely confirmed what Wall
Street already knew America's red-hot economy is steaming
along even as there are no red flags warning of inflation yet.
Economists had forecast a gain of 224,000 new jobs in
December, already topping November's number which was revised
down to a gain of 222,000 new jobs.
In the same report, the Labor Department said hourly wages
increased by 0.4 percent, just slightly more than the 0.3
percent Wall Street had expected.
David Jones, chief economist at Aubrey G. Lanston & Co. said
Friday's data were not entirely neutral but were also not a
"major jolt for the market" because the overall employment
figures were not far off expectations.
Therefore "there is not (any) kind of urgency to warrant a
50 basis point hike in February," he said.
But the question still haunting the financial markets is at
what point the Federal Reserve may need to shift into a faster
gear for tightening. U.S. stocks are just now recovering from
sharp losses fanned by fears earlier this week of more
aggressive rate hikes.
Sparking the concerns are forecasts that growth will top 4.0
percent in 2000, showing few signs of a slowing.
"The picture was not really altered by the jobs data but
rather by growth forecasts. With growth seen near 4.0 percent in
2000, the Fed will have to do a lot more this year than last
year to slow the economy down," said Warburg Dillon Read
economist Patrick Dimick.
While economists express certainty about a rate hike in
February, they remain split over whether the Fed will lift rates
by another quarter of a percentage point in March or May. Some
economists also saw a chance for a half a percentage point hike
A half a percentage point hike in February was seen as
unlikely because Fed chairman Alan Greenspan has not laid the
groundwork for such a move. But it remains a possibility for
March, Fed watchers said.
In the six weeks between the February and March meetings,
Greenspan will deliver key testimony before Congress and have
several other opportunities to prepare Wall Street if he deems
aggressive moves necessary, several economists said.
"We could have two or three appearances in that time and
there would be a statement from the FOMC where the Fed could
present a very hawkish case. It might be better to do this in
March with only 6 weeks between meetings rather than in May with
eight weeks between meetings," Chase Securities economist Bill