> Interest rate rise expected this week By Barbara Hagenbaugh, USA TODAY WASHINGTON - Federal Reserve policymakers are widely expected to raise interest rates to their highest level in three years when they meet Wednesday.
But the increase, the fourth this year, might be the last for 2004. Although news Friday showed employers added jobs at the fastest pace in seven months in October, uncertainties in the economy might lead Fed Chairman Alan Greenspan and his colleagues to stay on the sidelines next month. High oil prices, slower-than-expected business investment and a cloudy outlook for consumer spending could lead Fed officials to leave rates unchanged in December. "They'll sit that one out," says Rich Yamarone, director of economic research at Argus Research. Like other analysts, Yamarone says it's unlikely employers would continue to add jobs at October's pace. Firms added a seasonally adjusted 337,000 jobs last month, up from 139,000 in September, the Labor Department said Friday. The increase in October included the biggest jump in construction jobs in 41/2 years, which economists in part attributed to rebuilding in hurricane-ravaged areas. Such an increase is unlikely to be repeated. Still, Fed officials are widely expected to raise their target for short-term interest rates by a quarter-percentage point to 2% when they meet Wednesday. That will bring rates to their highest level since November 2001, when the Fed was swiftly cutting interest rates following the Sept. 11 attacks. Even at 2%, the Fed's rate target, which influences borrowing costs across the economy, would still be extremely low historically. The Fed typically raises rates to thwart inflationary pressures. Although few economists see an immediate inflation threat, some say the Fed must raise rates to a more "neutral" level, where policy neither stimulates nor dampens economic activity. Most economists say neutral is somewhere between 3% and 4%. Friday's strong jobs data did change some economists' expectations that the Fed would move in December as well as November to bring rates to neutral faster than previously thought. A market where investors bet on future Fed moves was pricing in a much higher chance of a rate increase in December on Friday than it had been Thursday, according to analysis by consulting firm Economy.com. Putnam economic adviser David Kelly expects Fed officials will raise rates in November, December and into 2005, not because of inflation worries, but because they feel comfortable the economy can do fine on its own. Plus, Fed officials need to be ready in case another shock, such as Sept. 11, hits the economy and they need to cut rates. "If the economy is healthy again, you have to reload your guns," he says
