U.S. Fed rate hikes not to be deterred: Swiss Re

Despite signs of sluggishness in the U.S. economy, the Federal Reserve Board shows no signs of being deterred from its measured approach to raising federal fund rates, notes a report by Swiss Re chief economist Kurt Karl.
“The Fed [Tuesday] reinforced its often-mentioned intent to raise the federal funds rate to a more neutral level, by raising the rate to 1.75%. Though the economy has been somewhat sluggish and inflation benign, the Fed must raise this rate roughly two percentage points above inflation, or to about 4.0%, by the end of 2005.”
Karl notes the expectation that the Fed will raise rates 25 basis points at each of its next nine or so meetings. “Though some analysts and the forward rate market are indicating this may be too rapid, given the weakness in recent economic indicators, the economy is sufficiently robust to withstand these increases, which are mild by historical standards.”
The expectation is for two more hikes this year in November and December putting the rate at 2.25% by year’s end.
In Canada, the expectation is also for continued rate hikes by the Bank of Canada, reaching 2.5% by year’s end.