Interest rates, including mortgage rates, will head higher as the Federal Reserve keeps trying to dampen inflationary pressure by slowing economic growth, many economists predict.
This effort will put the central bank on a collision course with the new administration and make it more difficult for President Bush to keep his campaign pledge to lower the budget deficit without resorting to new taxes, analysts say.Fed policymakers were gathering Tuesday for two days of closed-door meetings to set monetary growth targets for 1989. Their actions will not be revealed until Federal Reserve Chairman Alan Greenspan testifies to Congress on Feb. 21.
Private economists are widely predicting that the Fed will continue pushing interest rates higher because of fears that the economy is still growing too rapidly to keep inflation under control.
"There is no question that there will be a tightening. The question is how much," said Allen Sinai, chief economist of the Boston Co.
Some economists would not rule out a one-half percentage point increase in the Fed's discount rate, which now stands 6.5 percent, but other analysts argued that the Fed would probably avoid such a dramatic change in favor of more subtle behind-the-scenes tightening moves. The discount rate is the interest the Fed charges to make loans to commercial banks.
Since last March, the Fed has been draining bank reserves from the system, thus making money more scarce and the cost of money - interest rates - higher.
Analysts keep track of this process by watching the federal funds rate, the interest banks charge to make loans to each other. The federal funds rate now stands above 9 percent and analysts predict it is likely to rise by about one-quarter percentage more in the coming two months.
This will likely force banks to boost their prime lending rate, which now stands at 10.5 percent, already its highest level since mid-1985, economists say.
Economists also say that home loans, both adjustable and fixed-rate mortgages, are headed higher, with some predicting that fixed-rate mortgages will climb to around 11 percent. Currently, fixed-rate mortgages are averaging 10.6 percent.