The Federal Reserve is probably nearing the end of its string of interest rate hikes, but it remains unclear whether the economy will achieve a soft landing or crash into recession, several economists say.
These economists don't have a recession in their forecasts for 1995, but some say the possibility of one is growing, especially if the Fed is forced to slam on the brakes harder.The 12-member Federal Open Market Committee, composed of the seven Fed governors in Washington and five of the 12 regional Fed bank presidents, met Tuesday for their final interest-rate review of 1994.
In a practice started this year, the central bank was expected to announce any interest rate changes immediately following the meeting or put out a statement saying the session had concluded with no announced policy changes.
Going into the session, most economists were betting that the Fed will put off its seventh rate hike but not for long. Instead of the last meeting of 1994, they were pinpointing the first meeting of next year on Jan. 31-Feb. 1 as the most likely time for another rate boost.
To support this view, analysts noted that the Fed's last rate increase, the biggest in 13 years, occurred just five weeks ago; inflation statistics have remained benign, removing any urgency, and the Fed will not want to further roil financial markets so soon after the bankruptcy filing by Orange County, Calif.
"I think the Fed has reasons for waiting," said Bruce Steinberg, senior economist at Merrill Lynch in New York. "Usually after they have done a big move, they let a little time pass before moving again."
Since Feb. 4, the Fed has moved six times to increase rates - most recently Nov. 15, when two key rates were raised by 0.75 percentage point.
But many economists believe the Fed will raise rates one or perhaps two more times to achieve an additional 1 percentage point in total.
They said that the federal funds rate, which is now at 5.5 percent, would end up at 6.5 percent before the Fed calls it quits.
This assumption is based on a belief that the economy will show signs of a marked slowdown next year with growth, as measured by the gross domestic product, falling from 4 percent in the current quarter to 2 percent or less.
Next year's question, analysts said, will be whether the Fed's rate increases will bring on a recession of the soft landing policymakers have been aiming for.
"If the Fed goes much higher than they are now then we will be entertaining a significant chance of a recession," said Sung Won Sohn, chief economist of Norwest Corp. in Minneapolis.
Analysts point to history as their reason for concern. There have been nine recessions since World War II and only two times when the Fed was able to slow growth enough to keep inflation at bay while allowing the recovery to continue.
Those two times, in the 1960s and the 1980s, gave the country its two longest recoveries on record.
David Wyss, an economist at DRI-McGraw Hill Inc., said he believed the Fed could succeed again. "If we get the slowdown that we are expecting, then I think we can get another three years of expansion before we have to worry about the next recession," he said.
Analysts said that major banks' prime lending rate, the benchmark for many business and consumer loans, will rise along with increases in the federal funds rate, from 8.5 percent now to 9.5 percent early next year.
They predicted that fixed-rate mortgages, which last week hit a three-year high of 9.25 percent, will increase only a bit more, perhaps reaching 9.5 percent, but will begin to retreat as financial markets see growing signs of an economic slowdown.
Many analysts see mortgage rates slightly lower than where they are now by the time the home-buying season opens next April. l