The US Federal Reserve is likely to wrap up its campaign to boost interest rates by midyear at the latest as economic risks shift from inflation to slower growth, a panel of bank economists said on Friday.
The American Bankers Association's Economic Advisory Committee said it expects the Fed to raise overnight interest rates by a quarter percentage point to 4.75 percent at its meeting on March 27-28. It said another increase at the next policy meeting in May was likely.
"The balance of risk is shifting from inflation to slower growth," said Robert McGee, chief economist at US Trust Co in New York and chairman of the ABA panel. "The full impact of the past year's tightening has yet to be felt, which should raise a caution flag for the Fed."
The US central bank has raised benchmark rates in 14 straight small steps dating to June 2004 as it sought to bring them to more normal levels from an ultra-low 1 percent put in place amid the sluggish recovery from the 2001 recession.
The panel of bank forecasters said they expected growth in US consumer spending to slow to less than 3 percent in the year ahead and pegged the probability of the economy tipping into recession in 2007 at 20 percent.
It expects the US jobless rate to hold steady at its current 4.8 percent through next year. Some Fed officials have said they believe the economy is operating close to full employment, which would represent an inflation risk if the economy grew too swiftly.
The ABA panel said it expected 30-year mortgage rates to peak at 6.7 percent by the third quarter of next year. According to mortgage finance company Freddie Mac, the rate on 30-year home loans stood at 6.34 percent this latest week.
One economic risk the group cited was the slowdown in the US housing market, which has soared in recent years, shattering sales and construction records and boosting both home prices and consumer spending.
While the group said it expects housing to moderate, not take a nose dive, many uncertainties remain, including the impact of a push by federal bank regulators to make lenders tighten up underwriting standards on risky, alternative mortgage products.
McGee, echoing other economists, said house prices are unlikely to decline nation-wide, but some areas that experienced more significant gains could see prices drop.
"As home prices level off, so will the growth of equity that has supported consumer spending in the past," McGee said. "The impact from higher interest rates on home equity loans and adjustable rate mortgages will combine with stubbornly high energy prices to squeeze discretionary spending."
Among other risks, the panel noted terrorism or oil supply disruption, US pension losses and a slowdown in productivity growth.
Protectionist sentiment following the uproar in the United States around a deal that would have allowed Dubai Ports World, owned by the United Arab Emirates, to operate some US port terminals also poses a risk to the United States by threatening foreign investment flows, McGee said.
"As a country that takes in more international investment than any other country in the world, the United States could be quite severely affected if there was a sudden stop in foreign investment, which by the way would not just affect the US but that would have global implications," he said.
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