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Economic Forecasts

Interest Rate Hike? Not Til Next Year

With inflation tame and housing still hurting, the Fed will hold off.

The wait goes on. Likely it will be early 2011 when the Federal Reserve raises its benchmark interest rate. As usual the Fed wasn’t specific, but that’s the conclusion from reading between the lines of the latest policy statement by the rate-setting officials on the Federal Open Market Committee.

Officials see improvement in the economy since the last FOMC meeting six weeks ago, chiefly noting that the labor market “is beginning to improve.” But, the unemployment rate remains high, at 9.7%. And the key housing sector as the Fed puts it “remains at a depressed level.” At the same time, inflation isn’t remotely a threat.

So, no need to signal that a rate hike is getting close. The central bank has kept the fed funds rate, at which banks lend to one another on overnight loans, near zero since Dec. 2008. In turn, commercial banks have their benchmark prime rate at 3.25%. We see no change in either for the remainder of this year.

Fed officials will continue to insist that they’re on high alert for any sign of inflation, in an effort to reassure jittery bond traders. The Fed doesn’t want the markets to raise expectations of future inflation and send long-term interest rates upward. So look for yields on 10-year Treasuries to inch higher, hovering near 4% through midyear and heading toward 4.25% by year-end as the economic recovery takes hold and anxiety builds about budget deficits and the rising national debt.

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