More rate hikes seen from Fed

WASHINGTON – Oil prices are surging and wages are growing at the fastest clip in a year, reasons enough for the Federal Reserve to keep pushing interest rates higher the rest of the year and probably well into 2006 in an effort to keep inflation in check.

The Fed is expected to raise short-term rates a quarter-point today, the 10th increase starting in June of last year.

Despite that long campaign to tighten credit, rates still are too low, Federal Reserve Chairman Alan Greenspan and his colleagues have suggested.

“The Fed has much more work to do in tightening interest rates,” said Mark Zandi, chief economist at Economy.com.

“We will see bigger pay increases going forward, and businesses will try to defend their profit margins by raising their prices more aggressively,” Zandi predicted. “So I do think market pressures are developing that signal stronger inflation ahead.”

Fighting inflation is job No. 1 at the Fed. It has boosted a key rate, called the federal funds rate, by one-quarter percentage point nine times starting on June 30, 2004. A 10th increase on Tuesday would lift the funds rate, the interest that banks charge each other on overnight loans, to 3.50 percent.

In response, commercial banks are expected to boost their prime lending rate, used for many short-term consumer loans, by a corresponding amount, to 6.50 percent.

If the expected increases take place, both the prime rate and the funds rate would be the highest since Aug. 21, 2001.

Some economists believe the funds rate could rise to 4.25 percent by the end of this year. That would push the prime rate to 7.25 percent.

Greenspan, delivering the Fed’s midyear economic report to Congress last month, said the outlook for both the economy and inflation was good.

But he cautioned that a big run up in already high energy prices could throw a wrench in the outlook.